2.1.3 Liability Flashcards
Definition of limited liability
• 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
Definition of unlimited liability
• 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
Implications of unlimited liability
• 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
Implications of limited liability
• 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
More implications of limited liability
• 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.
Finance suitable for an unlimited liability business
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
Finance suitable for a limited liability business
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
