2.1.3 Liability

Question 1

Unlimited Liability

Answer 1

Unlimited liability is when business owner personally responsible for debts/liabilities in an unincorporated business like sole trader or partnership. This means owners personal assets are at risk when in need to pay debts.

Question 2

Limited Liability

Answer 2

Limited liability is when business’s legal identity is separate to the owners. Owner is only liable for initial outlay if business was to fail. Private Limited Companies (LTD) & Public Limited Companies (PLC) have limited liability.

Question 3

Implications of Unlimited Liability

Answer 3

-owner sells assets away to make profits for debt = owner bankrupt.
-unable to share sells
-owners decisions are clouded by risks- may create sales forecasts to decide whether a decision is worthwile as owner may need more planning due to risks in an unincorporated business.

Question 4

Implications of Limited liability

Answer 4

-Owner & business separate legal identities – business carry on even if owner dies.
-Business can sue/be sued – business sued e.g. due to unsafe products and can sue others=business liquidated (put to an end)=damage brand recognition.
-business can sell shares – LTD’s sell shares to family/friends whereas PLC’s sell shares on the stock exchange =
-Personal assets are not at risk – If the business fails then the owner will only lose any money that they have invested in the business.
The business is registered with companies’ house – The business needs to register with the companies’ house before it can become a LTD or PLC.

Question 5

Finance Appropriate for Unlimited Liability

Answer 5

-leasing – small businesses lease equipment if cannot afford to buy it.
-Bank overdraft/loan used if they suffer a poor trading period however high interest rates.
-owner’s capital -sole trader/partnerships use owner’s capital to reduce debt- use cross-subsidation?

Question 6

Finance Appropriate for Limited Liability

Answer 6

-Angel/venture capitalist, easy and quick upfront payment, but dilutes founder control and high interest rates.
-Retained profit – PLC’s and LTD’s receive significant amounts of profit = use it to invest big business projects such as expansion- cross subsidisation?
-Share capital – plcs/ltds sell shares in business due to large amounts of money they can make selling shares on stock market.
-Loans – able to take out loans due to big reputation. able to do this at low interest rate due to the bargaining power that business gain when they grow in size.