2.1.3 Liability and Finance

Question 1

what do potential entrepreneurs need to understand when starting a business?

Answer 1

financial risks
-debts are liabilities that can overwhelm a business owner because their personal assets will be at stake if the business goes into debt unless they set up the business as an incorporated company

Question 2

what happens if a business falls in to debt?

Answer 2

-creditors can get the courts to force the owners to pay these debts by selling their personal possessions and house
-if the owner still cannot pay they can be made personally bankrupt, affecting owners of sole trader and partnership as they have unlimited liability

Question 3

what is a downside of limited liability?

Answer 3

there is a scope for fraud, as opening a business and running up debts the business can’t afford puts the company into liquidation before customers receive a service they have paid for

Question 4

give some appropriate sources of finance for unlimited liability businesses.

Answer 4

-owners capital
-bank finance
-leasing, this is signing and agreeing to rent a specific asset for a specific period
-trade credit
-retained profit

Question 5

give some appropriate sources of finance for limited liability companies

Answer 5

-share capital
-bank finance
-peer to peer funding
-leasing and trade credit
-retained profit