“Debt is one person’s liability but another person’s asset.” – Paul Krugman
Defining contract clauses can be a good start in securing your business. The contract is the will of two or more persons with the intention of creating, modifying or extinguishing a legal relationship.
The parties are free to conclude any contracts and determine their content, within the limits imposed by law, public order and good morals. At the same time, the parties must act in good faith both during the negotiation and conclusion of the contract, and throughout its execution, and cannot remove or limit this obligation.
Liability laws play a significant role in how businesses are established and run. Article 1350 of the Romanian New Civil Code with respect to contractual liability provides the following:
(1) Everyone must fulfill his obligations.
(2) Where, without justification, it does not perform this duty, it shall be liable for the damage caused to the other party and shall be obliged to remedy such damage, in accordance with the law.
(3) Unless otherwise provided by law, neither party may waive the application of the rules of contractual liability in order to opt for other rules which would be more favorable to them.
These being said, what is liability?
Briefly, liability is an obligation to do or refrain from doing something.
In terms of finance: a claim against the assets, or legal obligations of a person or organization, arising out of past or current transactions or actions. Liabilities require mandatory transfer of assets, or provision of services, at specified dates or in determinable future.
In terms of accounting: accounts and wages payable, accrued rent and taxes, trade debt, and short and long-term loans. Owners’ equity is also termed a liability because it is an obligation of the company to its owners. Liabilities are entered on the right-hand of the page in a double-entry bookkeeping system.
In terms of law: responsibility for the consequences of one’s acts or omissions, enforceable by civil remedy (damages) or criminal punishment.
According to Investopedia, businesses sort their liabilities into two categories: current and long-term. Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period.
Limited and Unlimited Liability
The term limited liability is used to describe a situation in which those responsible for paying back a debt are limited in the amount of money they owe in repayments. In terms of business ownership, limited liability describes a legal arrangement in which business owners are financially responsible for only the amount of money they have put into the business. For example, if the owner of a small business sets up his company with limited liability, and later the business loses so much money that it must file for bankruptcy, the owner will owe only the amount of money that he initially put into the business.
The term unlimited liability describes a situation in which those obligated for paying back a debt have unlimited responsibility to pay it back. This means that a business owner is held personally responsible for the debts of his business if the business runs out of money to pay its debts. If the business accumulates debts and then closes down or is successfully sued for a large amount of money, the owner of the business will usually have to pay out of his personal finances.
In a nutshell, liability refers to the state of being responsible for something, and this term can refer to any money or service owed to another party.