2.1.3. Liability Flashcards
Limited Liability
Where a business owner is only liable for their original investment should the business fall into debt.The business and the owner have separate legal identities.
Unlimited Liability
If a business has debts the owner must pay even if this means doing their own possessions to find the money. Sole trader ad partnerships.
What are the two types of liability in businesses?
Unlimited liability and limited liability
Example of business with limited and unlimited liabilities:
Private sector business organisations
What is an example of a business with unlimited liability?
Sole traders and partnerships
Sole traders and partnerships are examples of businesses where owners are personally liable for debts.
What is an example of a business with limited liability?
1) Private limited companies and public limited companies
2) Private limited companies and public limited companies limit the liability of their owners.
What is a consequence of unlimited liability for sole traders or partners?
They may have to sell their own assets (like a family car) to pay the debts of the business.
What financial limitation do sole traders or partners face under unlimited liability?
They are unable to sell shares in the business.
How might unlimited liability affect a business’s ability to secure finance?
They may be able to secure finance by demonstrating to a bank that they are prepared to risk their own finances on the business.
What is a key feature of limited liability?
The owner and the business have separate legal identities and can sue or be sued separately.
What can the owner and the business do under limited liability?
They can own separate assets.
What can a business do under limited liability that it cannot do under unlimited liability?
The business can sell parts of the business called shares to shareholders.
What protection does limited liability provide to owners?
There is protection of the owner’s personal savings and assets; they cannot be made to sell them in the event of debts or business collapse.
What must a business do to qualify for limited liability protection?
A business must be registered with Companies House as a ltd or pic.
Unlimited liabilities- Implications
- Unable to sell shares in the business
- ## Sole traders or partners might have to sell their own assets ( e.g. family car) to pay debts of the business
Limited Liabilities - Implications
- owner + business have separate legal identities so can sue
- owner + business can own separate assets
- business can sell parts of business to shareholders
