The Dangers of Unlimited Liability for startups

Hrishikesh Datar

Serious business requires serious risk considerations, particularly if you’re taking on any liability in dealings with partners. Choosing to work as a sole proprietor could have damaging consequences.

Your focus as start-up is growing your business. This is just as it should be. But the legal implications of your actions are very much part of your business.

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And the concept of unlimited liability (i.e. the exposure of personal assets to debts owed by the business) is certain something you need to understand before you take on too much risk. If you’ve had any conversation with a legal professional, you may be familiar with the concept, but let’s discuss it in depth:

Depends on Risk

The reason quantum of risk is so important in this discussion because unlimited liability, which applies to sole proprietorships and general partnerships, is all about affordability. So long as your business is just you and a partner building a product out of a home office, you have nothing to fear because you really have nothing to lose.

But the moment it begins to grow – let’s say you’re a grocery delivery app partnering with retail stores – you need to strongly think about reducing risk. This is because you’re exposing yourself to liability. Now, what’s wrong with this? And how can registering a private limited company or limited liability partnership (LLP) solve it?

Creating a Separate Entity

Sole proprietorships and partnerships are informal entities, in that their owners are the whole and soul of the business. If the businesses owe money to anyone, it can be recovered from the proprietor or the partners’ personal possessions.

This means your liability is unlimited. However, with registered entities like private limited companies, one-person companies and LLPs, that have a legal existence of their own (through registration), your liability is limited to your investment in the business.

Improved Risk Taking Ability

The advantage to a registered entity is also increased risk-taking ability. This is because a director in a private limited company is aware that, no matter what happens in his business, what he has already earned is safe and untouchable.

What to Do?

When running a business, you’re always weighing the pros and cons of each move you make. So each time a question about risk pops up in your head, ask yourself if you would be better off distancing yourself from the consequences by registering a company or LLP. And don’t be bothered about the costs too much; if the risk your taking is large, the potential earnings will be good enough to justify the expense.

Also Read:

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