What Is an Unlimited Company?
An unlimited company is an incorporated company where profits and losses pass through to shareholders, and shareholders or members are responsible for outstanding liabilities in the event of a liquidation. There are risks and benefits to this approach to incorporation, and companies must consider their options carefully before making a decision about how to proceed with a planned incorporation. Accountants and attorneys are usually involved in the process of preparing to incorporate an unlimited company.
Also known as an unlimited liability company, with this type of company, as long as the company is in operation, members and shareholders are protected from financial liability. Once the company closes and liquidates assets, if outstanding debts remain, creditors can recover them from former members and shareholders. These individuals run the risk of not just losing their investments in the company, but also of losing personal assets as creditors attempt to recoup their losses in the event of a bankruptcy.
There are some tax advantages to operating as an unlimited company. For tax purposes, the company itself is not taxed because of the pass-through model of profits and losses. Only shareholders and members incur tax liabilities. This can prevent double taxation, where the company pays taxes, and beneficiaries also pay taxes on their earnings from the company. These companies are also usually excluded from reporting requirements and thus can keep their finances confidential, unlike other types of corporations.
The need of shareholders and members to meet financial obligations if the company goes under can be a significant concern with an unlimited company. This type of company can be advantageous when it is financially strong, with no worries about bankruptcy, and when it wants to retain confidentiality in its business dealings, as it does not need to file reports with government agencies. For companies with ample supplies of funding where it would not be necessary to approach a financial institution for a loan, this can also be a good way to operate.
Documents associated with the company will disclose its status as an unlimited company. Shareholders and members must pay close attention to financial obligations the company takes on, as they could end up being liable for them. They have an opportunity to vote on major decisions and may choose to vote against activities that could put the company, and their own financial futures, at risk. Members of the board supervising daily operations have a duty to protect the company and its shareholders, just as they do with other kinds of corporations.
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