Which of the following best describes 'unlimited liability' in accounting?

• A. A requirement for companies to disclose all financial information to the public.
• B. The ability of a business to operate without any legal restrictions.
• C. The legal obligation of business owners to be personally responsible for all debts and obligations of the business.
• D. A situation where a company's losses are limited to the amount invested by shareholders.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of 'unlimited liability' in accounting. Unlimited liability refers to the legal obligation of business owners, typically in sole proprietorships or partnerships, to be personally responsible for all debts and obligations of the business. This means their personal assets can be used to settle business debts if the business cannot pay them.
2. Step 2: Analyze the options provided in the question. Option A refers to disclosure of financial information, which is unrelated to liability. Option B mentions operating without legal restrictions, which is not accurate in the context of liability. Option D describes limited liability, which applies to corporations and not to unlimited liability.
3. Step 3: Compare the definition of unlimited liability with the correct answer provided in the question. The correct answer aligns with the definition of unlimited liability, as it highlights the personal responsibility of business owners for all debts and obligations.
4. Step 4: Reflect on the implications of unlimited liability. It is important to note that this type of liability exposes business owners to significant financial risk, as their personal assets are not protected from business debts.
5. Step 5: Conclude that the correct answer is indeed the legal obligation of business owners to be personally responsible for all debts and obligations of the business, as this matches the definition of unlimited liability.