Do sole traders have unlimited liability?

What is unlimited liability?

Unlimited liability means the business owner or owners are personally liable for any debts incurred by the company, regardless of the value. There is no legal separation between a sole trader and their business; the business’s debts and the business owner’s debts are one and the same.

What falls under unlimited liability?

There are a few reasons a sole trader’s unlimited liability may be triggered, including (but not limited to):

• Business debts – If you’re unable to pay rent, outstanding loans, taxes or your suppliers, your assets may be at risk from creditors. 
• Legal claims – If the business needs to pay after a court case, the owner’s personal assets can be claimed by creditors to settle the debt. 
• Broken contracts – If a personal guarantee is broken, this can also affect your company in the same ways that business debts and legal claims do. This can also apply to limited companies, even though the shareholders are separate entities from the company.

What is limited liability?

Now we’ve looked at the risks involving unlimited liability, let’s discuss the alternative.

Limited liability applies to any business where the owner(s) are separate legal entities from their business. For example, in the event that a private limited company falls behind on debts or becomes involved in a legal dispute, it’s up to the company to deal with it and not the shareholders. The business owners or general partners won’t be at risk of losing their personal assets.

There are other financial considerations to take into account when you have limited liability – if you’re considering changing your business type or starting a new business, we have guides on how to choose the right business structure as a trader, and the differences between sole traders vs limited companies. 

Do sole traders have unlimited liability?

Sole traders have unlimited liability (as do general partners), which means that, if the business doesn’t have the funds to cover a debt, the business owner’s personal assets, including their home, car and savings, could all be vulnerable to repossession.

This doesn’t mean that every dispute a sole trader faces will lead to losing their home, but it does mean they are personally liable for the business, and their personal finances and assets could be affected by the shortfall. 

How can you reduce the risks that come with unlimited liability?

To protect your assets and business as a sole trader, we recommend purchasing public liability insurance. In short, this coverage aims to protect your business from claims made by customers that could lead to legal proceedings. It typically covers any legal defences you have to pay for, compensation, and even settlement money you may have to pay out. This can help protect your personal assets if your business is liable. 

It’s also important to note that you must have public liability insurance to register as a Which? Trusted Trader.

Another benefit of being a Which? Trusted Trader that can help to reduce risks from unlimited liability is access to Alternative Dispute Resolution (ADR). This service is free for customers and can be used to resolve complaints or disputes that haven’t been resolved by the trader’s internal complaints service. ADR will try to resolve the problem through a third party, to avoid the issue going to court. For a sole trader, this can be a great way to minimise legal costs and reduce the risk of your assets being compromised.