6. Liability Flashcards
What is unlimited liability?
There is no legal difference between the owners and the business
Also called unincorporated businesses
What are the features of unlimited liability companies?
Tend to be small and owned by one person/a few partners
Owners will have unlimited liability
What are the advantages of an unlimited liability company?
Sometimes find it easier raising finance as lenders will be repaid if business defaults
More trustworthy as owners are more cautious as their personal assets are at risk
What are the disadvantages of unlimited liability ?
Risky
If they have no money they can be forced to sell personal assets which causes hardship for the owner
If the business collapses whilst owing money to external parties like banks, suppliers and tax authorities then owner will be forced to meet these debts from their personal resources
What is limited liability?
Has a seperate legal identity from its owners
Also called an incorporated business
What are the features of a limited liability company?
Can be sued, taken over, liquidated
Owners have limited liability
What are the advantages of a limited company?
Shareholders financial liability is limited to the amount that have invested in the business
If a limited company collapses the owners personal assets will be fully protected
Shareholders can’t be legally forced to sell personal assets to meet businesses debt
What are the Disadvantages of limited liability ?
Individuals are liable if a crime is committed or if a company has failed to maintain records (likely in private limited)
In some cases the owners of small limited companies are required to give personal guarantees of a company’s debts to those lending to the company.
Using appropriate finance : what factors influence it?
Whether short term or long term finance is needed
Type of expenditure (spending) for which the money is needed
Financial position of the business
Cost
Legal status of the business
How does whether short term or long term finance is needed influence choosing appropriate finance?
Long term: share capital
Short term: trade credit
Short term borrowing: leasing or business overdraft
How does the financial position of the business influence the choice of finance ?
Constantly changing
Poor financial position: lenders will be reluctant to offer finance and cost of borrowing will rise
Secure businesses: more willing to lend money with a large amount of collateral
How does the type of expenditure (spending) needed influence the choice of finance?
Undertakes heavy capital expenditure usually funded by long term sources of finance
Revenue expenditure is usually funded by a short-term source
How does cost influence the choice of finance?
Businesses prefer sources of methods that are less expensive in terms of payments/administration costs
How does the legal status of the business influence the choice of finance ?
This will depend on whether business has limited/unlimited liability
What finance is appropriate for unlimited liability ?
- these are appropriate as they are accessible to small businesses
Personal savings: usually used by small businesses to set up
Retained profit: can only be used if business survives and becomes established
Must generate enough profit to support both owners & future business investment
Crowd funding
Mortgages
Grants
Bank loans
Bank overdraft
Peer to peer lending
What finance is appropriate for limited liability
Share capital
Retained profit
Debentures
Venture capitalists
Business angels
Overdraft
Trade credit
Leasing
Grants
Unsecured loans
Mortgages
How is Share capital appropriate for limited liability businesses?
Rights issue: where existing shareholders are given the right to buy new shares at a reduced price
What are the advantages of Share captial for limited liability businesses?
Cheap , simple and creates free publicity
Regarded as a cost effective way of raising fresh capital
How is retained capital appropriate for limited liability businesses?
Around half of a businesses finance comes from retained profit they’ve accumulated over the years
How are debentures appropriate for limited liability businesses?
PLC’s can raise large amounts of money by selling debentures, it can be very long term
What are the advantages of debentures for limited liability businesses
Unlike shareholders, debenture holders have no control over businesses
How are venture capitalists appropriate for limited liability businesses?
They usually take a share in the business, having some control over key decisions. So they like to invest larger amounts of money than business angels
How are business angels an appropriate source of finance for both unlimited and limited liability businesses?
Provide funds for both limited and unlimited liability businesses
What are the advantages of business angels for limited and unlimited liability businesses?
Will take a share in the business
More likely to invest in the early stage than venture capitalists
