Limited liability businesses include corporations, limited liability companies (LLCs), or limited liability partnerships (LLPs). The owners of limited liability firms personal liability for firm actions is limited to the amount they have invested. Usually such businesses have to be registered or incorporated in a particular state and must comply with that state’s laws regarding its legal structure.
Unlimited liability firms include sole proprietorships and general partnerships. The owners of these firms have unlimited liability for the actions of the business.
The Threadbare Tire Company has manufactured defective tires that caused certain customers to die car accidents. Suppose one victim’s estate successfully sued the company for $5 million. Assume that Threadbare has net business assets of only $3 million. If Threadbare were a limited liability company, the owners would have no obligation to pay the $2 million needed to satisfy the remaining judgment against the company. If, on the other hand, Threadbare were an unlimited liability company, the owners would be responsible for satisfying the remaining judgment.