2.1.3 Liability

Question 1

What type of legal strucutre do soletraders and partnerships have?

Answer 1

• Sole traders & partnerships offer no legal protection to the owners in that the business assests and the owners personal assets are viewed the same (unlimited liability)

Question 2

What legal structure do the other forms of business have?

Answer 2

• Other forms of business ownership offer limited liability in which the assets of the owners are considered to be seperate from those of the business

Question 3

What is unlimited liability?

Answer 3

• Sole proprietors and partnership owners are fully responsible for all the debts owed by the business
• Owners also legally responsible for any unlawful acts committed by those connected to the business

Question 4

What are the implications of unlimited liability?

Answer 4

• There is no legal distinction between owners with unlimited liability and the business
• As a result business owners may have to use their own personal assets to pay debts or legal fees

e.g a sole trader may need to sell thier home to pay creditors if their business fails

Question 5

What is limited liability?

Answer 5

• Owners (shareholders) of private limited companies and public limited companies can only lose the original amount they invested in the business if it fails
• Shareholders are not responsible for business debts- In most cases the shareholders cannot be held responsible for unlawfulmacts committed by those connected with the business

Question 6

What are the implications of limited liability?

Answer 6

• Companies are incorporated (legally established) and owners are considered a separate legal entity to the business
• This means owners can undertake riskier ventures without fear of losing personal assets.
• This can lead to more profitable outcomes for the business, maybe they take the risk of investing in a new product/launching in anew market & it is highly successful

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 7

What are the other benefits of limited liability?

Answer 7

• Easier fundraising
  A private limited company can raise capital more easily than a sole trader by issuing shares.
  This can attract investment from family,friends & external investors

Question 8

What internal and external methods of finance are suited for limited liability businesses?

Answer 8

Internal:
Retained Profit
Debentures

External:
Venture capitalists
Share capital
Business angels

Question 9

What sources of finance are suitable for unlimated liability businesses?

Answer 9

Internal:
Personal savings
Retained profit

Bank:
Unsecured loan
Overdraft
Mortgage

Suppliers:
Trade credit
Leasing

Investors:
Crowd funding
Peer to peer lending

External Bodies:
Grants

Question 10

What is the downside to attract finance for an unlimited liability business?

Answer 10

• Unlimited liability businesses, as well as businesses that own few assets, often struggle to raise finance as they’re seen as risky
  Businesses that present more of a risk to lenders may choose to raise finance through venture capitalists, business angels or crowdfunding
• Lenders (e.g. banks) prefer to lend to more established businesses that own assets
• Investors prefer to invest in limited companies as they are often able to obtain a share in the business