Limited liability means that the maximum amount that an owner stands to lose in the event that the company becomes insolvent and cannot pay off its debits is his share of capital in the business.
Unlimited liability means that if the business runs up debts that it is unable to pay, the proprietors will become personally liable for the unpaid debts, and would be required, if necessary, to sell their private possessions in order to repay them.
Sole traders are generally fairly small concerns. The amount of capital involved may be modest, and the proprietor usually participates in managing the business. His or her liability for the debts of the business is unlimited.
Limited companies offer limited liability to their owners.
Thus limited liability is a major advantage of turning a business into a limited company. However, in practice, banks will normally seek personal guarantees from shareholders of a small owner managed company before making loans or granting an overdraft facility, and so the advantage of limited liability is lost.
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