Difference between Limited and Unlimited Company

The type of entity to use is one of the biggest decisions while starting a business. One of the most important considerations in this connection is to decide whether you will have limited or unlimited liability as the owner. Understanding this difference and choosing the structure that will suit you can help save your personal assets from the business creditors. The main difference between a limited and unlimited company is in liabilities as given under.

What is a limited liability company?

Limited liability means that the liability of the owners or investors of a company is limited to the total amount of money which they have invested in the business. When the firm is registered as a limited liability firm, the owners of the company will be safe in the event the company goes bankrupt. To elaborate on this idea, ‘limited liability’ will imply that the owner’s losses are only limited to the proportion of their specific share and he or she cannot be made responsible for the losses that are beyond the share of their contribution. We can say ‘Corporation’ is the most popular kind of limited liability company.

In a corporation, the owners are shareholders. Their liabilities are limited to the amount of funds they have invested. In case the company has to file for bankruptcy, the shareholders will only lose their investments in the firm. However, they will not be held liable for the losses that are beyond what they have contributed to the firm.

In addition to the advantages, there are also some disadvantages in this model. The managers of a limited liability company are protected against any personal liability. This will mean that their assets cannot be seized for the sake of paying the losses.

What is an unlimited liability company?

We can say unlimited liability is just the opposite of limited liability. In this case, the liability that the owners and investors might have is not limited to the amount that they have contributed. This means that there is no limit to the losses that the owners or investors have to bear.

Nevertheless, there are some strong benefits to investing in a company labelled as ‘unlimited liability’. In financial management, there is a popular phrase which says, “higher the risk, higher the returns”. This will hold good especially in case of unlimited liability companies. Since the risks in front of the investors is very high in case of the unlimited liability model, it is most likely that the investors will get a higher rate of return in the event the company performs well.

How to say the difference between these two types of entities?

Limited and unlimited liability mainly talk about the obligations that the owners have in front of them. They say whether the owners are obliged only in proportion to the sum they have invested in the company or if they can also be held liable personally in case of any losses. In the former case, the personal properties of the owners or investors will not be forfeited if the company suffers losses or goes bankrupt. In the latter case, the personal properties of the investors will also be at stake in the event the firm goes bankrupt.