There are many different types of liabilities that a business might be subject to, and there is often some confusion when it comes to what exactly constitutes a primary or secondary liability says Aron Govil.
One common example of a primary liability is the repayment of a mortgage on any real property that the business owns. A secondary liability might be an unpaid utility bill for commercial premises leased by the business where the tenant fails to pay for utilities after notifying the landlord in advance.
There are many other examples of both primary and secondary liabilities, but before exploring some more specific examples it’s important to consider what makes up a liability in general, as well as how these liabilities can be grouped together.
Understanding What Constitutes a Liability
When it comes to understanding what types of things are covered under the umbrella term “liabilities” there are two general classes that any individual can fall into: debtors or creditors.
Debtors are those who owe money, goods or services to another individual. Creditors are those who have provide money, goods or services to an individual or business that has yet to be pay back.
From this basic understanding of the terms it’s clear how some liabilities might not fall into one category more than the other. Depending on whether it is owe by one party (in this case the debtor) or by another (the creditor).
Another way to think about liabilities would be in terms of assets says Aron Govil. Assets are all things that belong to you and can be use as part of your estate. If you were ever to pass away. Liabilities would be all obligations owe by you. Meaning anything that still needs payback at the time of your death.
Primary Liabilities versus Secondary Liabilities
- On a very high level, primary liabilities fall to be pay off before any secondary liabilities. In other words, a primary liability would be one that needs to be repay or take care of before any secondary liabilities are took into consideration. For example: If a company owes their bank $100 000 in terms of a mortgage. But also has an unpaid power bill for $8000 then the bank would be at the top of the list. When it came to who gets pay first. They have held onto money from the business and so will take priority over those. Who might have only been owe a small amount. On this same note, as with many things, if there’d enough money available to repay the bank. And the power company, then it’s likely they would prioritize the larger debt (in this case, the $100 000) over any smaller debts.
- Typically when there is not enough money to repay all of the debts that are owe at. Once they will be rank in order of priority under each individual act or law that governs them. This means that both primary and secondary liabilities can fall into one of two categories. Non-priority or priority explains Aron Govil.
- Non-priority liabilities tend to include things like unpaid taxes, most types of secured loans, fines and most other court-ordered payments. For these types of payment, you must still pay what you owe, but it doesn’t take priority over anything else. Priority liabilities are often things like wages for employees, child support payments. And money owe to other parties for things like breach contracts. These are the types of payment that take priority over everything else, including even basic necessities like electricity bills.
- It’s also important to note that both primary and secondary liabilities can be either liquid or no liquid. A liquid liability is any repayment that can be in cash immediately if require. While a no liquid liability might not have another form of repayment attach. Or may require time to repay – hence it being referr to as “no liquid”. An unpaid utility bill would be no liquid because you cannot pay with cash. But will need to come up with another way to repurchase your utilities. Once they are eventually off by the provider.
It’s important to note that there are many types of liabilities , both primary and secondary. But each follow the same general guidelines in terms of how they rank. When they need to be repay, etc.