After reading this article you will learn about unlimited and limited liability of an organisation.
Unlimited Liability:
In this system, there is no maximum limit of capital which can be collected from debtors in the case of failure of business. The creditors may collect money even from the personal property of the owner. Because of the risk involved in this system is very high, it provides a most serious limitation for those businesses in which unlimited liabilities are involved.
Therefore, if unluckily the business runs into heavy loss or fails, the owner and his family will suffer seriously and even may be reduced to poverty.
Effect of unlimited liability on:
(a) Sole Trade Organisation:
In this type of organisation if the business goes into loss, the whole amount has to be paid by a single person (owner) upto the last paisa of his personal property. Therefore, due to the risk of heavy losses to be borne by the individual, this type of organisation is confined to small scale manufacturing or works of small nature.
(b) Partnership Organisation:
In this type of organisation all the partners have unlimited liability. This means that if property of the firm is insufficient to clear the debts of the firm, then the creditor can collect the money from the personal property of the individual partner. In this way, as risk involved in this system is less than that of the sole trade organisation, the partners will not hesitate even to start medium size concerns.
Limited Liability:
In case of limited liability the maximum limit of amount that can be collected from an owner or shareholder is upto the capital invested by him in the industry. Thus the risk involved is limited to the amount of shares only and their private property cannot be sold.
Effect of limited liability on:
(а) Joint Stock Company:
In this system liability of a member is limited to the face value of the shares he purchases. Thus shareholder is responsible to the extent of amount of shares purchased by him. This type of organisation has unique feature in this respect; therefore, now- a-days big industries are being run with this form of organisation.
(b) Co-operative Society:
In this system also shareholder is responsible upto the extent of the face value of the shares purchased by him. As regards liability is concerned it is similar to those of Joint Stock Company.