What's the difference between limited and unlimited liability?

Limited and unlimited liability are parts of the legal identity of a business, whether that business is a new sole-trader or long established private limited company (LTD). Whether a business has limited or unlimited liability describes who is responsible for paying any debt or other costs incurred by events such as bankruptcy or bad debt, usually occurring if a business has bad cash flow. Business types with unlimited liability are generally sole-traders and partnerships. If the value of a business rises or the owners want to decrease the risk of their investment, they generally 'incorporate' the business, making it into a private-limited company that features limited liability, similar to a public-limited company (PLC). This process can be more tedious than setting up a sole-trader or partnership business and also has higher costs, which is why this is not often done initially.Unlimited liability means that the owners and business are the seen as the same legal identity, and are personally responsible for any of the mentioned costs incurred by bankruptcy or other events. Therefore they are legally required to sell personal assets, eg. houses, cars and jewellery to pay for the outstanding debt. In the case of limited liability this is not the case and the owners are a different legal entity to the business. Thus, limited liability is generally preferred and offers better protection to the owners if something were to happen to the business.