Chapter 28- Liability Flashcards
Unlimited liability
A business model where the owners are liable for all business debts – there is no legal difference between the owners and the business
- Business owners with unlimited liability are exposed financially to the failure of their business – if their business collapses while owing money to external parties, such as banks, suppliers and the tax authorities, the owners will have to meet these debts from their personal recourses
- Owners of businesses with unlimited liability are also liable for any
unlawful acts committed by the owners or the employees - Businesses with unlimited liability find it easier to raise finance, this is
because lenders will be reimbursed if a business defaults – unlimited
liability businesses are often also seen as more credible
Appropriate finance:
- Personal finance
- Mortgage
- Unsecured bank loans
- Peer-peer
- Grants
- Crowd funding
Limited liability
A legal status that means that shareholders can only lose the amount originally inputted to the business
- The main advantage is that the owners of businesses with limited liability
are shareholders – the main advantage of this is that shareholders’
financial liability is limited to the amount of money they invested in the
business - If a limited company collapses, the owners’ private assets are fully
protected – shareholders cannot be legally forced to sell personal assets
to meet the business’s debts. - Because shareholder’s private assets are protected, limited companies
may find it easier to raise larger amount of money from investors – as a
result investors are more willing to buy shared in limited companies
because they know precisely the extent of their liability is limited to the size
of their investment
Collateral
An asset that might be sold to pay a lender when a loan cannot be repaid
Incorporated business
A business model in which the business and the owners have a separate legal identity
Long term finance
money borrowed for more than one year
Right issue
issuing new shares to existing shareholders at a discount
Unincorporated business
A business where the business and the owners have the same legal identity