2.1.3 Liability

Question 1

What is meant by Unlimited liability?

Answer 1

Business owners are fully responsible for all debts owed by the business. As a result, these business owners may have to use their own personal assets to pay debts or legal fees

Question 2

What is meant by Limited liability

Answer 2

Business owners can only lose the original amount they invested in the business if it fails. This means that if a company fails, the owners would lose their investment (shares) but would not have to use their assets to meet additional debts or legal fees

Question 3

Methods of finance suitable for Limited liability businesses

Answer 3

Internal: debentures , share capital and retained profit
External: venture capitalists and business angels

Question 4

Methods of finance suitable for Unlimited liability businesses

Answer 4

Internal: retained profit and personal savings
External: bank (unsecured loan , overdraft and mortage), trade credit and leasing , grants , crowd funding and peer-to-peer lending

Question 5

Drawbacks of Unlimited liability businesses

Answer 5

Struggle to raise finance as they’re seen as risky
- they may be small, own few business assets (e.g. to use as collateral) or have a limited trading record

Question 6

Benefits of Limited liability businesses

Answer 6

Investors prefer to invest in these companies as they are often able to obtain a share in the business and they are more established businesses that own assets

Question 7

What types of businesses have Unlimited liability?

Answer 7

Sole traders and partnerships

Question 8

What types of business have Limited liability?

Answer 8

Private limited company (Ltd) and public limited company (PLC)

Question 9

What does Liquidation mean?

Answer 9

Occurs when a company’s owners close down the company , selling of its assets to generate cash to pay off the debts of the business