2.1.3 - Liability

Question 1

What is limited liability

Answer 1

• Limited liability means that a business owner is only liable for their original investment should the business fall into debt, their personal possessions are not at risk

Question 2

What is unlimited liability

Answer 2

• Unlimited liability means that If a business has debts the owner must pay even if this means selling their own possessions to find the money

Question 3

What are the business types of an unlimited liability business

Answer 3

• The two main business forms that have unlimited liability are sole traders and partnerships

Question 4

What are the implications of an unlimited liability

Answer 4

• If a business gets into financial trouble or is sued a sole trader or partnership businesses may have to sell their own assets (like a family car) to pay the debts of the business
• The business and the owner are seen as one legal entity, so are equally liable (responsible) for the debts

Question 5

What type of companies are limited liability

Answer 5

• The two main business forms that have limited liability are private limited companies (ltd) and public limited company (plc)

Question 6

What are the implications of limited liability

Answer 6

• The owner and the business have separate legal identities so can sue or be sued separately
• The owner and the business can own separate assets
• The business can now sell parts of the business called shares to shareholders
• There is protection of the owners personal savings and assets, in the event of debts or business collapse, the owners cannot be made to sell their personal possessions (like a house) to pay the debts of the business off.
• The owners would only lose their original investment in the business and no more.

Question 7

What finance is suitable for an unlimited liability business

Answer 7

The main types of finance that are suitable for sole traders and partnerships are:
* Business loans from a bank
* Private investors e.g. angels
* Credit cards from a bank
* Crowd funding from websites
* Trade credit from suppliers
* Owners savings
* Overdraft from the bank

Question 8

What finance is suitable for a limited liability company

Answer 8

Limited companies and PLCs will be able to get access to different types of finance:
* Retained profit from the business
* Sale of assets from the business
* Ordinary and preference share issues
* Government grants
* Venture capital – as they may be borrowing larger amounts than unlimited liability businesses