2.1.3 - Liability Flashcards
What is unlimited liability, and which types of businesses have it?
Unlimited liability means that the business and the owner are seen as one under the law, so any business debts become the personal debts of the owner. Sole traders and partnerships have unlimited liability.
What happens if a business with unlimited liability cannot repay its debts?
The owner may have to sell personal assets, such as their house, to pay off the business debts.
What is limited liability, and which businesses have it?
Limited liability means that owners are not personally responsible for the business debts. Shareholders in private and public limited companies have limited liability because the company is a separate legal entity from its owners.
How does limited liability affect the risk for shareholders in a business?
The most shareholders can lose is the money they have invested in the business if it fails.
How does liability impact sources of finance for a business?
- Businesses with limited liability?
- Businesses (sole traders + partnerships) with unlimited liability?
Businesses with limited liability find it easier to attract investors, as investors know their risk is limited. Sole traders and partnerships with unlimited liability rely more on internal sources or external sources like loans, overdrafts, leasing, and trade credit.
What financing method can limited companies use that businesses with unlimited liability cannot?
Limited companies can raise finance through share capital, as they are owned by shareholders, which businesses with unlimited liability cannot do.
Can businesses with unlimited liability raise finance by offering shares?
No, businesses with unlimited liability cannot raise finance through share capital, but they can still attract investment by offering a share of the business, such as through business angels. However, their unlimited liability status may limit the amount of investment.
In some cases, why might businesses with unlimited liability find it easier to raise finance than limited companies?
If a business with unlimited liability becomes a limited company, finance providers might worry that the owners are trying to protect themselves, making them less willing to offer finance.
However, lenders may be more willing to finance businesses with unlimited liability, as they know the owners’ personal assets will be used to repay debts if necessary.
