2.2.3 Liability

Question 1

What is unlimited liability

Answer 1

The owner of the business is personally responsible for any debt and tax.

Question 2

What is an advantage of using unlimited liability

Answer 2

Easier to raise finance as the lender will be paid back if the business fails

Question 3

Sources of finance for a business using unlimited liability

Answer 3

1. Personal savings
2. Retained profit
3. Bank
4. Peer to peer lending
5. Crowd funding
6. Government grant

Question 4

What is limited liability

Answer 4

The owner is a separate entity from the business. If a business goes into debt then the are only liable for their original investment

Question 5

What are the 2 businesses that use limited liability

Answer 5

Public limited company (PLC)
Private limited company (LTD)

Question 6

What are the 2 businesses that use unlimited liability

Answer 6

Soletrader
Partnership

Question 7

What are the methods of finance used by businesses using limited liability

Answer 7

1. Share capital
2. Retained profit
3. Venture capital
4. Other sources in some combination e.g. grants, overdraft

Question 8

What are the 3 factors influencin the choice of appropriate finance

Answer 8

1. Financial position of the firm
2. Length of time the finance is required
3. Cost

Question 9

How does financial position of the firm influence the choice of what finance

Answer 9

Poor financial positions make lenders reluctant to offer finance and borrowing costs rise

Question 10

How does the length of time the finance is required for influence the choice of what finance

Answer 10

Consider share capital (long term) vs trade credit (short term) vs mortgage (20years)

Question 11

How does cost influence the choice of what finance

Answer 11

Interest payment and administration costs