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The disadvantages of an unlimited company startup

Forming an Unlimited Company

The disadvantages of an unlimited company startup: an unlimited company has some clear advantages in terms of assuring creditors and maintaining privacy. In this type of corporation, the members and shareholders are responsible for financial obligations to creditors in the event of formal liquidation. This means that the assets of those shareholders and members are up for grabs if there are still unpaid bills once the company has been liquidated. This in turn tends to encourage much more responsible executive management, and a tendency towards lower risk endeavours, so it reassures creditors that they are dealing with a solid company.

All in all, liquidity is not a reasonable option for an unlimited company. This status also grants less transparency over specific transactions - namely that it's often not required for an unlimited company to publish financial statements; this grants extra shareholder privacy, and shields important information from potential competitors. However, there are some obvious reasons as to why the limited corporation is much more common than an unlimited structure.

Unlimited liability: the financial structure of an unlimited corporation is much the same as a limited company, until it comes to formal liquidation. With the unlimited option, there is no protection for members and shareholders. While this might encourage responsibility, in the event that liquidation is unavoidable, it lays a great financial burden at the feet of shareholders.

Essentially, there is no limit to how much they might stand to lose, as their assets are regarded in much the same way as company assets to creditors. Until the bills are paid, someone has to keep paying. This obviously isn't an appealing prospect for many members and shareholders, as the failure of the company stands to threaten everything you own. Personal bankruptcy is not an appealing possibility to shareholders, and it can act as a deterrent.

Minimising entrepreneurial endeavours: this heavy burden also brings with it a tendency towards low risk. While this is a good way to perhaps maintain a company, it isn't necessarily a good model for growth.

There is a lot to be said for entrepreneurial spirit when it comes to gaining capital, so the heavy stakes of unlimited status can potentially injure the development of an unlimited firm. If you need to discuss the further advantages and disadvantages of unlimited company startup, please get in touch with us!