Types of business liabilities

Every business will take on liabilities at some point, no matter how big or small it is. But what matters is how you manage those liabilities, as it can either make or break your business.

Liabilities are more than just debts or bills to pay; they’re an important part of your financial picture and can affect everything from cash flow to your ability to grow. For small business owners and corporate leaders alike, knowing the different types of liabilities and how they show up on your balance sheet can help you make better financial decisions.

While accounting software can help you keep track of it all, it’s still crucial to understand what liabilities are and what they mean for your business. Let’s break it down.

What are business liabilities?

A business liability is something your company owes. Usually it's money, but sometimes it's a legal responsibility. Think of it as a financial obligation to another person or company. This could be anything from unpaid invoices and taxes to loans or even legal settlements.

Types of business liabilities

There are a few different types of business liabilities:

• Current liabilities

• Non-current liabilities

• Contingent liabilities

According to Statistics Canada, as of the fourth quarter of 2024, private non-financial corporations in Canada held a total credit market debt of $2,182.7 billion. This includes both current and non-current liabilities, such as bonds and loans. While business liabilities mean you owe something, they’re not inherently bad. In fact, when managed wisely, they’re often a sign your business is building toward something bigger.

What are current liabilities?

Current liabilities, also known as short-term liabilities, are debts or obligations a business is expected to pay off within one year. These often show up in the day-to-day running of your business and are important to monitor because they directly affect your cash flow.

According to the Business Development Bank of Canada (BDC), paying off your current liabilities is mandatory. That’s why it’s so important for businesses to keep a close eye on how their current liabilities stack up against their current assets. The difference between the two is called working capital, and it shows how easily a company can cover its short-term debts. Here are some of the most common types of current liabilities:

Accounts payable

This is one of the most common and recognizable current liabilities for any business. Accounts payable refers to money owed to vendors, suppliers, or service providers. Let’s say you run a coffee shop and order $1,000 worth of beans, cups, and syrups from a supplier on 30-day terms. That invoice becomes part of your accounts payable until you settle it.

Short-term loans

These are loans your business must repay within 12 months. This could be a line of credit, a merchant cash advance, or a traditional short-term business loan. Let's say you take out a $10,000 loan to stock up on inventory for your retail store ahead of the holiday season, with a repayment schedule over the next six months. This loan is considered a current liability because it's due within a year.

Accrued expenses

Accrued expenses are costs that your business has recognized but hasn’t paid yet. These often include things like employee wages, utilities, and rent. Let's say you pay your employees bi-weekly, but your accounting period ends in the middle of a pay cycle. The portion of wages earned but not yet paid would be recorded as an accrued expense.

Taxes payable

Any taxes that your business owes but hasn’t yet paid fall into this category. These include income taxes, sales taxes, and property taxes. Let's say your business is located in Ontario, where you collect GST/HST on sales. That tax is considered a liability until you remit it to the Canada Revenue Agency (CRA), which is usually monthly or quarterly.

What are non-current liabilities?

Non-current liabilities, also called long-term liabilities, are debts or obligations your business isn’t expected to fully pay off within the next 12 months. These liabilities play a big role in financing business growth, from buying buildings to funding product development. While they represent future financial commitments, they also help businesses access capital and scale more quickly.

Non-current liabilities show how much risk you're taking on to expand, and whether you have the financial structure to manage it. Potential investors and lenders may use this information to assess your long-term stability. Here are some of the most common types of non-current liabilities:

Long-term loans

These are loans that extend beyond one year and are often used for larger business investments. Let's say you own a manufacturing company and you take out a $100,000 bank loan with a five-year term to buy new equipment. Even though interest and principal payments are made monthly, the bulk of the debt will remain on the books as a non-current liability until it’s paid off.

Bonds payable

These are debt securities issued by companies or institutions to raise cash, which is typically paid back with interest over a fixed term. Say a large corporation issues $5 million in bonds to fund a major expansion. Investors purchase the bonds, and the company agrees to pay them back in 10 years, with annual interest payments. The bond amount remains a long-term liability until maturity.

Capital lease obligations

When a business signs a long-term lease for equipment or property, the future lease payments (if they meet certain accounting criteria) are recorded on its balance sheet as liabilities.

Let's say you own a construction firm and you lease a crane under a five-year lease-to-own agreement. Since the contract meets the criteria of a capital lease, it’s recorded as a non-current liability on the balance sheet.

Deferred tax liabilities

These are taxes a business owes, but payment is deferred to a future period, often due to timing differences between accounting laws and tax rules. Let's say you use accelerated depreciation on your business's equipment for tax purposes but report straight-line depreciation on your financial statements. The difference creates a deferred tax liability where you might owe more tax in later years.

Pension obligations

If a business offers retirement benefits, these are long-term promises that must be recorded as liabilities, since the company will be responsible for them in the future.

Let's say you offer healthcare and pension benefits to your retirees. Based on actuarial estimates, you'll record the expected future payouts as a pension liability on your company's balance sheet.

What are contingent liabilities?

Contingent liabilities, sometimes called potential liabilities, are obligations that might arise in the future depending on the outcome of an uncertain event. According to the Government of Canada, a contingency refers to an existing situation with uncertainty about whether there will be a gain or loss. That uncertainty is resolved only when future events do or don't occur.

Unlike current or long-term liabilities, these aren't guaranteed and won’t always show up on the balance sheet. Still, they’re important to track, especially for businesses in high-risk industries or those dealing with legal matters. Here are common types of contingent liabilities:

Lawsuits

If a company is being sued and there's a strong chance it will lose the case, the potential damages become a contingent liability.

Let's say your software company is being sued for $200,000 over alleged intellectual property infringement. If legal counsel believes you will likely lose and can estimate the cost, it must record this as a liability.

Product warranties

Warranties are promises to repair or replace defective products. Since there’s a reasonable expectation that some claims will occur, companies typically estimate and record warranty liabilities.

Let's say you're an electronics manufacturer and you offer a 12-month warranty on your products. Based on past claims, you estimate 2% of sales will require warranty repairs, so you'll record that amount as a liability.

Insurance costs

Companies that self-insure or carry high deductibles may also record contingent liabilities for future claims or payouts, especially when incidents have occurred but the full costs aren’t known yet.

For example, if a company’s building gets damaged or an employee is injured, and it’s not fully covered by insurance, there could be unexpected initial costs and more costs down the road.

Since most businesses carry several types of insurance, like property, liability, or workers’ compensation, these potential liabilities are often estimated based on expected insurance-related expenses.

When to record or disclose a contingent liability

According to Investopedia, before a contingent liability can be officially recorded in your financial statements, it has to meet two key conditions:

• You need to be able to reasonably estimate how much it might cost

• There has to be more than a 50% chance that the liability will actually happen

If both of those boxes are checked, then the liability gets recorded as an expense on your income statement and also shows up as a liability on your balance sheet. However, if there’s less than a 50% chance that the event will occur, you don’t include it on the balance sheet. In those cases, or when the potential cost is uncertain, it’s typically disclosed in the notes to the financial statements instead.

What happens if you ignore contingent liabilities?

If a potential legal issue, warranty, or insurance claim isn’t disclosed or accounted for, it can catch your business off guard, both financially and legally. It may lead to unexpected expenses or damage your credibility with investors or lenders. It could even violate accounting standards. Worse, if stakeholders find out you withheld important risk information, it could break trust and hurt your reputation.

How do business liabilities affect business valuation?

Liabilities have a direct impact on how a business is valued by investors, buyers, lenders, and financial analysts. While some debt is normal and even necessary for growth, too many liabilities can signal financial trouble and lower the company’s overall worth. How a firm’s liabilities factor into valuation:

They can impact creditworthiness

One of the first things lenders and investors look at is your debt-to-equity ratio and working capital. If you’re carrying more liabilities than assets, it can raise red flags about your ability to pay off debt, which affects your creditworthiness. Businesses with lower, well-managed liabilities tend to get better loan terms and attract more investors.

Too many can risk bankruptcy

Too many liabilities, especially short-term debts, can signal financial instability, especially if the business can’t meet short-term obligations.

If your liabilities keep piling up faster than your assets or income, that kind of imbalance can push your business toward insolvency or even bankruptcy, which can significantly lower your valuation. Investors and lenders start to lose confidence when it looks like you might not be able to cover your debts.

They can affect your ability to sell

During a sale or merger, liabilities are carefully analyzed.

When a buyer evaluates your business, they consider both what you own and what you owe. A company with heavy debt loads may receive a lower offer (or be passed over entirely) because the buyer would be taking on all of that financial risk.

Tips to help you manage your business liabilities

Managing your business liabilities isn’t just about staying out of debt. It’s about keeping your finances strong and protecting your company. Here are some practical tips to help you handle business liabilities:

Keep a close eye on cash flow

You can’t pay off debt if you don’t know what’s coming in or going out. Regularly check your cash flow to make sure you have enough to cover your short-term bills, like rent, utilities, payroll, and vendor payments. You can use accounting tools or dashboards to monitor your income and expenses in real time.

Balance your assets and liabilities

Liabilities are only one part of the financial picture. You should also focus on building strong assets. A positive working capital, where your current assets exceed your current liabilities, indicates you’re in a good position to meet day-to-day obligations and take on growth opportunities without over-leveraging.

Set up a contingency fund

Set aside a portion of your profits for a contingency fund. This helps you handle unexpected expenses, such as repairs or late customer payments, without taking on more debt. A good rule of thumb is to maintain at least three to six months’ worth of operating expenses.

Conduct legal risk audits

Legal exposure can create massive contingent liabilities if left unchecked. Have a legal advisor review your contracts and business practices from time to time. This can help you identify areas of risk and address them before they become costly issues.

Make sure you're properly insured

Business insurance is a key part of liability management. The right insurance can save your business if something goes wrong. Types of business insurance you may want to consider for your business include:

• Commercial general liability insurance

• Professional liability insurance

• Commercial property insurance

• Business interruption insurance

• Commercial auto insurance

• Cyber insurance

It’s all about reducing the financial fallout from potential lawsuits, accidents, or damage. Contact BrokerLink today to find out what types of business insurance your business can benefit from.

Contact BrokerLink to learn more

Need help assessing your business risks? Talk to a BrokerLink advisor today to secure your liability protection. Our brokers can help you assess your business and find you the coverage you need at a competitive price.

You can reach us by phone, email, or in person at any one of our locations throughout Canada. No matter how you choose to get in touch, a BrokerLink insurance advisor will be happy to assist you. We also encourage you to take advantage of our free online quote tool that can provide you with a competitive quote in minutes.