Which of the following best defines unlimited liability?

Unlimited liability refers to a situation where the owners of a business are fully responsible for the debts and liabilities of that business. In the context of unlimited liability, it means that if the business cannot repay its debts, the owners could potentially lose not only the money they invested in the business but also their personal belongings and assets. This risk emphasizes that there is no legal distinction between the owner's personal finances and the business's finances.

This concept is crucial for sole proprietorships and partnerships, where the owners may face personal financial consequences if the business fails. The clear implication is that their personal assets — such as homes, cars, and savings — could be claimed to settle business debts, which underscores the risk associated with such business structures.