Limited or Unlimited Liability Businesses?

Michael Sack Elmaleh, C.P.A., C.V.A.

A business may have limited or unlimited liability. Limited liability businesses include corporations, limited liability companies (LLCs), or limited liability partnerships (LLPs). The distinguishing feature of limited liability firms is that the owners’ personal liability for firm actions is limited to the amount they have invested. Usually such businesses have to be registered or incorporated in a particular state and must comply with that state’s laws regarding its legal structure.

Unlimited liability firms include sole proprietorships and general partnerships. In these firms the owners have unlimited liability for the actions of the business. The distinction between limited and unlimited liability businesses boils down to the extent to which an owner can be sued for the actions of the business. 

Example

The Threadbare Tire Company has manufactured tires that were so defective that certain customers lost life and limb in various car accidents. Suppose the estates of the deceased successfully sued the company for $5 million. Let’s further suppose that Threadbare has net business assets of only $3 million. If Threadbare were a limited liability company, the owners would have no obligation to pay the $2 million needed to satisfy the remaining judgment against the company. If, on the other hand, Threadbare were an unlimited liability company, the owners would be responsible for satisfying the remaining judgment. 


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Financial Accounting by Mike Elmaleh

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