A legal status that makes the owner personally liable for all business debts is called

• A. Unlimited liability
• B. Limited liability
• C. Shared liability
• D. No liability

Answer: (A)

Unlimited liability is when the owner’s personal assets can be used to cover all the business’s debts. This is typical for sole traders and general partnerships, where there’s no legal separation between the business and the owner. If the business can’t pay what it owes, creditors can claim from the owner’s personal wealth, such as savings or a home. In contrast, limited liability protects personal assets; owners’ losses are limited to what they have invested in the business, which is why companies (and certain partnerships) are described as having limited liability. The other terms aren’t standard ways of describing this situation, and no liability isn’t a realistic option for ordinary business forms.