Unlimited liability means that each owner of a business can be held personally liable for the debts of the organization. For example, an individual invests $50,000 in a sole proprietorship. The sole proprietorship then incurs $200,000 of debts. The individual is personally liable for the entire $200,000, even though he only invested $50,000 in the business. This means that a creditor could legally seize the personal assets of the individual in order to pay the debts of the business. The unlimited liability concept is of particular concern for large and unexpected liabilities that a business does not plan for and has no cash reserves against, such as an adverse outcome of a lawsuit against the firm.
Because of this unlimited liability drawback, many people prefer to structure their businesses to have limited liabilities, where investors can only lose the amount of their original investments.
The unlimited liability concept is attached to sole proprietorships, general partnerships, and the general partners of limited partnerships. Liability can be limited by using the corporation, limited partnership, or limited liability corporation structures.