Liability(2.1.3) Flashcards
Limited liability
owners (shareholders) of PLC and LTD can only lose the original amount they invested in the business if it fails
shareholders are not responsible for business debts
in most cases shareholders cannot be held responsible for unlawful acts by those connected with the business
Unlimited liability
sole proprietors and partnership owners are fully responsible for all debts owed by the business
owners are also legally responsible for any unlawful acts committed by those connected to the business
Why is finance needed?-liability
capital expenditure on buildings and expensive equipment will usually require a longer term method of finance such as loans
revenue expenditure is more likely to be funded through a short term method such as trade credit or overdraft
Length of time?-liability
for quick short term finance businesses may use methods such as overdrafts trade credits short term loans and leasing
if a business needs access to finance over the longer term methods such as a share issue debentures mortgages or grants may be more suitable
Who will lend to the business?-liability
start up or struggling businesses may find their choice of finance limited and will often pay much more to access it than more established stable businesses
businesses that present more of a risk to lenders may choose to raise finance through venture capitalists business angels or crowdfunding
unlimited liability businesses as well as businesses that own few assets often struggle to raise finance as they are seen as risky
how much will it cost and how easy is it to access the finance?-liability
methods of finance that attract interest
e.g loans mortgages and overdrafts are less affordable for businesses when interest rates are high
interest free methods of finance are usually more complex to access
e.g share issues and grants
What is the legal status of the business?-liability
unlimited liability businesses often struggle to raise finance
leaders prefer to lend to more established businesses that own assets
investors prefer to invest in limited companies as they are often able to obtain a share in the business
