liability – the extent of the owner's responsibility for the debts of the business

(Pronounced lai-uh-bil-uh-tee)

(Note the difference between the terms liability and liabilities)

To remember what liability means use the following mnemonic:

He lied about his ability (liability) to run the business and is now responsible for the debts.

Liability also means the level of responsibility that the owner has for the debts (liabilities) of the business.

Many businesses are formed as private limited companies (shown by the use of the ‘Ltd’ at the end of their names). This means that the owner’s responsibility for any debts accrued by the company is limited, and they cannot be held personally responsible for them.

Adversely, unlimited liability means that the owner will be held personally responsible for their business’s debts.