Liability and finance Flashcards
What is unlimited liability?
This is when a business and their owners are seen as a single entity legally - sole traders and partnerships.
This means that any debts become personal debts to the owner(s) - in this case if owners have debts without sufficient cash to pay for them, they may be forced to sell personal assets like their house off to pay off debts - can be dangerous.
What is limited liability?
When the owners are not personally responsible for paying back the debts of their business.
The shareholders (owners) of both private and public limited companies have ltd liability, as a limited company is a separate legal entity to it’s owners. Thus the most owners can lose if the company fails and has debts is money that they have invested.
Why do businesses with limited liability tend to be more attractive to investors who want to buy shares in the business?
This is because people are more likely to become a part of the business if they know they can only possibly lose what they are putting in.
How does unlimited liability affect sole tradors and partnerships abilities to borrow externally in terms of buying shares in a business? What sources and methods of finance are they likely to use?
They are less likely to find people who will buy shares as they could lose their own belongings if things go wrong. Thus they will rely on methods like loans, overdrafts, leasing and trade credit for capital, with sources such as Family, crowd funding and banks.
- Ltd companies can raise finance through share capital, but businesses with unlimited liability are not owned by shareholders so cannot rely on this. Whilst they could access finance in return for shares (venture), it is likely their status as unlimited liability will discourage investors from investing a lot as they are not protected.
Why may it be easier for businesses with Unlimited liability to raise finance in some cases?
If they are unlimited, investors/banks may perceive them as more confident of sucess and may be more likely to invest.
Also sources of finance also know that if a business that is unlimited goes bust, they will most likely get all of their money back, even if it means the owners have to sell all they own to pay back debts.
