Unlimited liability company: what is it?

If there are companies whose liabilities are limited, where can’t there be ones with unlimited liabilities?

Here is to tell you that there are companies with unlimited liabilities. Who and what they are, what they are called, and more will be discussed in this article.

What is an unlimited liability company?

To start with, an unlimited liability company is a company whose liabilities are the responsibility of its owners. In other words, its liabilities are not limited to it alone such that any loss is the loss of the owners too. This also means that the company is not a separate legal entity from its owners, unlike limited liability companies.

Often, small businesses and companies fall under this category until they are ready to scale up and become limited liability companies. There are reasons why some businesses choose to start this way, one of which is the ease of start-up. We will look into the details in the next few subheadings.

Types of businesses that have unlimited liability form of setup

The types of businesses that are set up using this type of structure are sole proprietorships, general business partnerships, and freelancers. 

Advantages of unlimited liability companies

As much as the unlimited liability company setup does not look attractive, yet, many small companies choose this style of business and you are probably wondering why. Here are a few of those reasons.

1. Be the don of your business. You do not have to be accountable to anybody when you set up an unlimited liability company. Even in the general partnership, all partners are equally liable except there is a controlling partner who manages the affairs of the business on a day-to-day basis.
2. All profits from the business belong to the owners after tax. There is no legal obligation for the owners to roll back profits into the business after filing the annual tax. The profits can be used up by the owners. This means more pay for the owners of the unlimited liability company.
3. Easy to start. When you run an unlimited liability company, you do not need to be registered with the Companies House before commencing business. All you need to do is register to pay taxes through Self-Assessment to the HMRC. You can also choose not to register for Self-Assessment until you have a yearly taxable income of up to £1000 when it is compulsory to do so. You do not even have to have a board of directors or make up an elaborate team. One person can start an unlimited liability company which is why freelancers belong to this category.
4. Easy to scale up to a limited liability company. Beginning as an unlimited liability company makes for easy management and can be scaled up to become a limited liability company as the company grows. This is often how many startups began operations before being incorporated.
5. Accounting is easy. Doing accounting for unlimited liability businesses is simple and straightforward and often does not need the expertise of an accountant to be done. You can simply use the traditional method of accounting of book balancing or use an Excel Spreadsheet if you are up to it.
6. Every asset of the business belongs to the owners and vice versa. Since the business is regarded as the same legal entity as its owners, every asset the company owns belongs to the owners and the assets of the owners also belong to the company. In other words, you could choose to use your car for your business and if you bought a car for the business, it could be used for personal things too.
7. It is easier to run and organise. Since you are the don of your business, you do not have to answer to any shareholder, member, or board of directors. You are the sole decision-maker. This makes it easy to make decisions that would benefit the company, especially where customer retention decisions have to be made.
8. Legal paperwork is simple. You almost do not need the help of a legal practitioner to set up your business except for the general business partnership that may need a form of an initial agreement between or among partners. Otherwise, you can decide not to get a lawyer involved in your business at all. Tax filing is also easy to be done because you only need to know the amounts of profits made in a year and your allowable personal allowance per year.

Disadvantages of unlimited liability companies

1. Unlimited liabilities. This is perhaps one of the major disadvantages of unlimited liability companies because it means that the company’s liabilities are not limited to it alone. In other words, if the business runs at a loss of any amount, the owner or owners are liable to pay back every dime and it could cost them their assets. The business and its assets belong to the owners after all. Also, if the company is being sued, the owners are the ones being sued and they bear all the legal costs and could even be jailed. The bottom line is, as much as all the profits of the company belong to its owners, its liabilities are borne by them too.
2. The life of the business is short. Since the ownership of the company can only be transferred through testament after the death of the original owner or handing over to a friend or family member, the sudden death of the owner may be the end of the business. This means that the business’ lifespan is short unless the owner can have the foresight to do proper handing over if death is imminent. Even in partnership, if a major partner pulls out, that could be the end of the business especially if he is the major funding member.
3. Funding is sometimes difficult. Except the owner has a slush fund or has initial financial backing, getting funds from financial institutions can be difficult for unlimited liability companies. This is because the uncertainties surrounding the sustainability of the business discourage most financiers.

Conclusion

Unlimited liability company structure of business setup is perhaps the most used in the United Kingdom and the world has seen a rise in that since the beginning of the pandemic. This is because of its ease of setup and being able to scale up to a limited liability company when the company is ready to expand.