DECA+ Business Management and Administration Practice Exam

What does unlimited liability mean for business owners?

1. Their personal assets are protected from business debts

2. They are only liable to the extent of their business profits

3. They are personally liable for all debts incurred by the business

4. They can transfer liability to another party

The correct answer is: They are personally liable for all debts incurred by the business

Unlimited liability refers to the legal obligation of business owners to be personally responsible for all the debts and obligations of their business. This means that if the business incurs debts, enters into contracts, or faces lawsuits, the owners' personal assets—such as their home, car, or savings—can be at risk in order to satisfy business debts. In contrast, the other options suggest scenarios where personal assets are shielded or liability is limited, which does not align with the principle of unlimited liability. For instance, the notion of protection of personal assets contradicts the essence of unlimited liability, as it explicitly indicates that personal assets are vulnerable. Similarly, being liable only to the extent of business profits or having the ability to transfer liability to another party is not applicable in the case of unlimited liability, since the business owner remains personally responsible regardless of the business's financial position or ability to outsource liability.