Liability 2.1.3 Flashcards
What is meant by limited liability?
Shareholders can only lose the amount of money they invested in the business, not liable for any debts.
The condition by which shareholders are legally responsible for the debts of a company only to the extent of the nominal value of their shares.
What liability do sole traders have?
Unlimited liability.
What is a limited company?
The company owns assets and pays the debts and has a separate legal identity from the founder. Owned by shareholders and run by a founder. Shareholders are not liable for debts.
A type of business structure where the company has a legal identity of its own, separate from its owners (shareholders) and its managers (directors).
What is an unincorporated business?
The owner is the business. No legal difference between owner and business. The owner has unlimited liability for business actions including debts. Most unincorporated businesses operate as sole traders.
What liability do unincorporated business’s have?
unlimited liability
What liability do incorporated businesses have and who owns them?
Owners (shareholders) have limited liability. The legal difference between the business (company) and the owners. They mostly operate as private limited companies.
Company is a separate legal identity.
Owners of a company are shareholders.
The company may lose its assets but the personal wealth of the owners is protected. Shareholders are protected by the law and lose only the money they put into the business.
What is unlimited liability?
Characteristic of unincorporated businesses. Business owners are personally responsible for the debt and liabilities of the business. If the unincorporated business fails, the owners are liable for the amount owed. Unlimited liability adds to the risk of operating as a sole trader or partnership.
give 2 example’s of incorporated business
private limited company.
public limited company.
give 2 examples of unincorporated business
sole trader.
partnership.
What is the importance of limited liability?
Important protection for shareholders in the company.
Shareholders can only lose the value of their investment. They are not liable for the debts of the company.
What are the implications of a limited company?
If the company becomes insolvent (when it can’t pay back it’s debts), suppliers may not get paid and customers may lose deposits, therefore, employees may find themselves redundant, and suppliers and customers may lose large sums each year, to avoid risks most lenders create guarantees.
What finance is appropriate for limited liability businesses?
- Share capital, - ideal for big businesses using reputations to raise large sums of money. Private limited companies can get equity (share) finance from individuals, usually themselves and people they know personally. A small group of shareholders can keep control of the business; this is why a few big businesses stay private long after they could have gone public. Using their reputations, they can raise large sums for capital investment, without having to pay it back or pay interest. Shareholders will expect dividends but not when trading conditions are difficult and profits are low or worse. PLCs can sell shares on the Stock Exchange.
- Bank loans would typically need to be backed by specific collateral.
- Peer-to-peer or crowdfunding: both these sources
tend to keep control more effectively in the hands of the founder.
What are the implications of unlimited liability?
Your personal assets are at risk if the business sees high levels of liability. This is could be especially stressful if you have dependents to support. Securing a loan could be more difficult due to the increased risk. An unlimited liability business does not have its own legal identity and the owner(s) are personally responsible for all debts of the business.
What finance is required for unlimited liability?
- Owners’ capital: In the case of a partnership, an agreement might be drawn up basing the proportionate ownership of the business on the amount of capital invested by each partner.
- Bank finance, either loan or overdraft: It is often easier for an unlimited liability business to obtain bank finance because even if the business fails, the bank can recoup its cash from the personal assets of the individual owners.
- Leasing: Signing an agreement to rent a specific asset for a specific period (perhaps three years), therefore avoiding the cash drain caused by purchase.
