What is the difference between limited and unlimited liability?

The two concerns the level of responsibility for debts of a business if it happens to fail. Limited liability means that a shareholder can only lose the investment they made into the company if it fails. Limited liability occurs only when the business has a separate legal identity to its owners. Unlimited liability occurs when there is no separation of legal identity, for example in a partnership or for a sole trader. The owner of the business is liable to all debts recoverable if and when the business fails.