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The concept of unlimited liability refers to circumstances in which a party has no ceiling on the amount they can be held accountable for if something goes wrong. In contrast, limited liability means there is a cap on the financial exposure, protecting personal assets beyond a specified threshold.
When you’re running your business in 2025, you naturally want to limit your liability as much as possible. On the flip side, when entering into agreements with other businesses, you might prefer them to assume unlimited liability so they remain fully accountable should issues arise. The decision to opt for limited versus unlimited liability depends on the unique circumstances and risks associated with your business activities.
There are two key ways you and your business can manage liability: by establishing a limited liability business structure and by embedding robust liability limitations in your contracts. This article will explore both approaches in detail.
Limited Liability vs Unlimited Liability Business Structures
The extent of liability protection your business enjoys depends greatly on the structure you choose. Let’s take a closer look at the main business structures and the kind of liability each one entails.
Company
A company is a business structure favoured for its ‘separate legal entity’ principle. This means the company is treated as an independent person, able to enter into contracts and assume legal obligations much like an individual would.
Under a company structure, the business owners generally benefit from limited liability – they are not personally liable for the company’s debts or wrongdoings, provided no personal guarantees have been given and all corporate formalities are maintained. The potential liability is confined to the company’s assets, shielding your personal wealth.
So why isn’t a company structure adopted by every business, given its appealing liability protection? A major factor is that setting up a company can be more complex and costly. In 2025, companies continue to face rigorous compliance requirements – from filing separate tax returns to maintaining distinct accounting records – which may not be practical for every entrepreneur.
It’s also important to note that there are two common exceptions to the limited liability rules for companies:
- If the owners have signed a personal guarantee, for example on a bank loan;
- When a director breaches their director’s duties, thereby losing the benefit of limited liability.
In either of these scenarios, the business owners could face unlimited liability if things go wrong.
Partnership or Sole Trader
Sole Trader
An operating as a sole trader is generally less secure compared to a company structure. While it’s cheaper and easier to set up, the sole trader model comes with unlimited liability, meaning you are personally on the hook for any debts or legal claims against the business.
| Example You’ve started selling home-grown produce from your backyard. As a small business owner not yet ready to incur the additional costs of establishing a company, you choose a Sole Trader structure to keep things simple. One of your customers complains that they became ill after consuming one of your products. They claim a refund and indicate they will report the matter to the ACCC. Under unlimited liability, you would be personally responsible for any compensation or costs resulting from the claim. In a more severe situation, if higher compensation was demanded, your personal assets – such as your car or home – could be at risk. |
Many sole traders try to mitigate this risk by taking out business insurance. While this can help cover certain losses, insurance policies come with limits, exceptions, and conditions, meaning that even an insured sole trader might still face personal liability for certain business issues.
Partnership
A partnership structure similarly does not offer inherent limited liability – partners are typically personally liable for the business’s obligations. This means that if something goes wrong, creditors can pursue each partner for the full amount, regardless of individual contributions. The one notable exception is a limited liability partnership (limited liability partnership), where partners are only accountable for their own actions and not for the negligence of others.
Like sole traders, partnerships are relatively cost-effective to set up, and some of the liability risk can be moderated by taking out business insurance. However, they generally do not provide the same degree of protection from personal liability as a company structure.
If you’re considering forming a partnership, our expert lawyers can draft a tailored Partnership Agreement to help manage and clearly define each partner’s liabilities.
How Can My Contracts Limit My Liability?
Beyond selecting an appropriate business structure and securing insurance, well-drafted contracts are an essential tool for reducing liability. By embedding specific clauses into your key agreements – such as customer and supplier contracts – you can significantly limit the potential exposure of your business.
So, which clauses should you include?
Limitation Of Liability Clauses
The most common clause used to limit liability in contracts is the Limitation Of Liability Clause.
This clause sets a cap on the amount for which you can be held liable under the terms of the contract. It may also restrict the circumstances or time frames within which you can be held responsible. The key advantage is that, should a dispute arise, a customer or supplier can only claim damages up to the maximum amount agreed upon in the contract – a critical protection for businesses, especially given the increasing litigation risks in 2025.
| Example A typical limitation of liability clause in a web design contract might state: To the maximum extent permitted by applicable law, the maximum aggregate liability of the Web Designer to the Client in relation to any loss or damage under or in connection with this agreement is limited to the total Fees paid by the Client. Imagine a scenario where a web designer builds a website for a client, and the site crashes due to the designer’s negligence. Ordinarily, the client might seek to recover all losses, including fixing costs and lost revenue. However, thanks to the limitation of liability clause, the client’s claim is capped at the fees paid. This measure prevents potentially damaging claims that could jeopardize the business’s future. |
Exclusion Clauses
Often accompanying limitation clauses are exclusion clauses, which specifically identify circumstances where the limitation does not apply. Common exclusions include instances of fraud, willful misconduct, or criminal activity. It’s essential to review the scope of any exclusion clause carefully, as these are the situations in which you or your business could face unlimited liability.
Understanding the exact meaning and breadth of exclusion clauses is vital – a misinterpreted clause could expose you to significant risks. Always work with a lawyer to ensure these provisions offer the protection you require.
| Example Revisiting the web designer scenario, imagine the contract includes an exclusion clause stating: The limitation of liability in this agreement will not apply where the Web Designer infringes the intellectual property rights of a third party, causing loss or damage to the Client. If the web designer were to copy content from a competitor’s website, leading to a copyright infringement claim against the client, this exclusion clause would come into effect. Consequently, the designer would not benefit from the limitation clause and could face unlimited liability in relation to the claim. |
What Is The Contra Proferentem Rule?
Because exclusion clauses can be complex and open to differing interpretations, they must be drafted with utmost clarity. If any ambiguity arises, the contra proferentem rule will apply – meaning that any uncertainty in the wording of the clause will be interpreted against the party relying on it. This legal principle is designed to protect the party that might otherwise be unfairly disadvantaged by a vague clause.
In essence, if a dispute arises over an exclusion or limitation clause, the court will interpret the clause in a way that favours the party that did not draft the contract. As such, it’s crucial to have a lawyer review your contracts to ensure they are as clear and watertight as possible.
For further assistance on reviewing your contracts, you might find our guide on contract review and redrafting particularly useful.
Key Takeaways
Liability remains a complex issue, but getting it right can save you considerable expense and stress. Your business structure, the contracts you enter into, and the insurance policies you secure all influence the degree of liability your business is exposed to in 2025.
Regularly reviewing your legal arrangements is essential as new technologies, evolving consumer expectations, and updated regulations continue to shape the landscape. For instance, our Business Structures and Intellectual Property guides offer insights into how to adapt your contracts and business models to the latest legal challenges.
It’s wise to seek expert legal advice to ensure that your business is built on a robust framework of limited liability and that your contracts incorporate well-drafted limitation and exclusion clauses. A proactive approach to risk management today can save you from significant losses tomorrow.
If you would like a consultation on any of the issues raised in this article, you can reach our team of legal consultants at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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