Liability Flashcards
Define the term limited liability.
Limited liability means that a business owner is only liable for their total investment in the business, not anything above that amount. Should the business fall into debt, their personal possessions are not at risk.
Define the term unlimited liability.
Unlimited liability means that If a business has debts the owner must pay even if this means selling their own possessions to find the money.
What business forms most commonly have unlimited liability.
Partnerships and sole-traders.
What are the implications of unlimited liability.
Sole trader or partners may have to sell their own assets to pay the debts of the business
They are unable to sell shares in the business
However they may be able to secure finance due to the fact that they are demonstrating to a bank that they are prepared to risk their own finances on the business
What are the implications of limited liability?
The owner and the business have separate legal identities so can sue or be sued separately
The owner and the business can own separate assets
The business can now sell parts of the business called shares to shareholders
There is protection of the owners personal savings and assets, in the event of debts or business collapse, the owners cannot be made to sell their personal possessions (like a house) to pay the debts of the business off.
The owners would only lose their original investment in the business and no more.
What types of finance are suitable for an unlimited liability business?
he main types of finance that are suitable for sole traders and partnerships are:
Business loans from a bank Private investors e.g. angels Credit cards from a bank Crowd funding from websites Trade credit from suppliers Owners savings Overdraft from the bank
What types of finance are suitable for a limited liability business?
Limited companies and PLCs will be able to get access to different types of finance:
Retained profit from the business Sale of assets from the business Ordinary and preference share issues Government grants Venture capital – as they may be borrowing larger amounts than unlimited liability businesses
