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LEGAL DICTIONARY

Liability

What Is a Liability?

A liability is an obligation –like money, goods, or services– that you owe another party. A liability is the opposite of an asset, which is something you own, or another party owes you.

Accountants view and list liabilities differently than expenses. Expenses are the costs of business operations, while liabilities are the obligations a company owes. Expenses are associated with generating revenue. However, if a company cannot meet the cost of operation, those owed commitments can become liabilities.

Types of Liabilities

Businesses and accountants view liabilities in terms of when they are due. There are two primary types of liabilities—current and long-term. Current liabilities are those that are payable within a year, and long-term liabilities are payable over a more extended period.

Sometimes there is an overlap between the two categories. For example, a 15-year mortgage is a long-term liability. However, the monthly mortgage payments are listed in the short-term liabilities section of the business balance sheet.

Current liabilities

Also called short-term liabilities, current liabilities include accounts payable to vendors and monthly utility bills. Other examples include:

  • Employee wages
  • Interest on short-term credit purchases
  • Dividends owed to shareholders
  • Unearned revenues (the obligation to deliver pre-paid goods or services at a future date)
  • Discontinued operations (the financial impact of an entity that is for sale or has been recently sold or discontinued)

Long-term liabilities

Long-term or non-current liabilities are those that need to be paid in one year or longer. Financial analysts and accountants want to ensure that a company can handle its long-term liabilities with assets from future earnings or financing transactions.

Bonds and loans are long-term liabilities companies. Other examples include:

  • Warranties (the responsibility to repair products over a set length of time)
  • Deferred credits (revenue collected before it is listed as earned on the income statement)
  • Post-employment worker benefits

Individual or household liabilities

Liabilities are not just part of the business world. Individuals and households also must balance what they own (assets) against what they owe over the long term (liabilities).

For most individuals and households, liabilities include taxes, rent or mortgage payments, loan interest, and principal. If you are an independent contractor who is paid in advance for a job or service, you may also have that liability.

Liability also has another separate definition, meaning when a company or a person is liable or responsible for damages inflicted on another party. So, how can business owners protect themselves from liability? Many small entities set up a Legal Liability Company (LLC). This business model helps protect business owners from full liability, such as lawsuits and other financial ramifications.

As part of creating their LLC operating agreement, the owners of an LLC must make a decision regarding their LLC tax classification. The choice, which depends on the business size and its goals, does not change the type of entity but how the IRS will tax it.

Doctors, accountants, attorneys, and other professionals who are in a group practice together often use a Limited Liability Partnership (LLP) to help protect them from lawsuits that allege negligence or wrongful acts by partners in their organization.

What Is a Release of Liability?

A release of liability is an agreement between two parties that acts as a legal waiver in the event something goes wrong during an activity. One party agrees not to hold the other party legally responsible for potential injuries or damage.

This waiver is typically used when an action involves a level of risk. However, it can also be used to release photographs or information.

Helpful Resources:

Investopedia - Liability: Definition, Types, Example, and Assets vs. Liabilities

Cornell Law - Liability

Corporate Finance Institute - Liability: Definition, Accounting Reporting, & Types

What Is a Liability?

A liability is an obligation –like money, goods, or services– that you owe another party. A liability is the opposite of an asset, which is something you own, or another party owes you.

Accountants view and list liabilities differently than expenses. Expenses are the costs of business operations, while liabilities are the obligations a company owes. Expenses are associated with generating revenue. However, if a company cannot meet the cost of operation, those owed commitments can become liabilities.

Types of Liabilities

Businesses and accountants view liabilities in terms of when they are due. There are two primary types of liabilities—current and long-term. Current liabilities are those that are payable within a year, and long-term liabilities are payable over a more extended period.

Sometimes there is an overlap between the two categories. For example, a 15-year mortgage is a long-term liability. However, the monthly mortgage payments are listed in the short-term liabilities section of the business balance sheet.

Current liabilities

Also called short-term liabilities, current liabilities include accounts payable to vendors and monthly utility bills. Other examples include:

  • Employee wages
  • Interest on short-term credit purchases
  • Dividends owed to shareholders
  • Unearned revenues (the obligation to deliver pre-paid goods or services at a future date)
  • Discontinued operations (the financial impact of an entity that is for sale or has been recently sold or discontinued)

Long-term liabilities

Long-term or non-current liabilities are those that need to be paid in one year or longer. Financial analysts and accountants want to ensure that a company can handle its long-term liabilities with assets from future earnings or financing transactions.

Bonds and loans are long-term liabilities companies. Other examples include:

  • Warranties (the responsibility to repair products over a set length of time)
  • Deferred credits (revenue collected before it is listed as earned on the income statement)
  • Post-employment worker benefits

Individual or household liabilities

Liabilities are not just part of the business world. Individuals and households also must balance what they own (assets) against what they owe over the long term (liabilities).

For most individuals and households, liabilities include taxes, rent or mortgage payments, loan interest, and principal. If you are an independent contractor who is paid in advance for a job or service, you may also have that liability.

Liability also has another separate definition, meaning when a company or a person is liable or responsible for damages inflicted on another party. So, how can business owners protect themselves from liability? Many small entities set up a Legal Liability Company (LLC). This business model helps protect business owners from full liability, such as lawsuits and other financial ramifications.

As part of creating their LLC operating agreement, the owners of an LLC must make a decision regarding their LLC tax classification. The choice, which depends on the business size and its goals, does not change the type of entity but how the IRS will tax it.

Doctors, accountants, attorneys, and other professionals who are in a group practice together often use a Limited Liability Partnership (LLP) to help protect them from lawsuits that allege negligence or wrongful acts by partners in their organization.

What Is a Release of Liability?

A release of liability is an agreement between two parties that acts as a legal waiver in the event something goes wrong during an activity. One party agrees not to hold the other party legally responsible for potential injuries or damage.

This waiver is typically used when an action involves a level of risk. However, it can also be used to release photographs or information.

Helpful Resources:

Investopedia - Liability: Definition, Types, Example, and Assets vs. Liabilities

Cornell Law - Liability

Corporate Finance Institute - Liability: Definition, Accounting Reporting, & Types