In the context of business structures, what is "unlimited liability" referring to?

Unlimited liability refers to a legal obligation whereby an individual or business is responsible for all debts and obligations incurred by the business. This means that if the business fails or accumulates debts, the owner's personal assets—including savings, property, and other valuables—can be pursued by creditors to settle the business's debts. This is a common characteristic of sole traders and partnerships, where personal and business finances are not legally separated.

The concept highlights the level of risk involved in certain business structures. Owners need to be particularly cautious with financial management since their personal financial security is at risk if the business does not perform well. Understanding unlimited liability is vital for potential business owners as it influences their decisions on the structure they choose for their enterprise.