Business 2.1.3 Liability

• What is the definition of limited liability?

  Where the shareholders of a business can only lose the value of their investment in the share capital of the company.

  • Therefore, the shareholder’s liability is limited to their investment and are not the same as the business.
  • Limited liability reduces the financial risk of the shareholders and this allows the business to raise more finance as people are more willing to buy shares.
• What is the definition of unlimited liability?

  Where the owner/s is or are personally liable for the debts of the business.

  • If the business fails and is left owing money, these debts can be received from the business owners. The reasoning for this is that the business doesn’t have a separate legal identity from the owner.
  • Should the business incur debts, then the owner may be forced to sell personal assets in order to repay them.
  • if they cannot, then they are declared bankrupt.
• The type of finance available to a business can depend on if they have limited or unlimited liability.
• Owner’s capital / Personal Savings:

  More applicable for start - ups and small businesses so unlimited liability.
• Retained Profit:

  Major source for limited liability businesses. Unlimited liability businesses will be limited as their profits will be far lower than limited liability businesses.
• Sale of Assets:

  Limited liability are more likely to use this because they have a bigger asset base.
• Family / Friends:

  Widely used by start - ups so appropriate to unlimited liability.
• Banks / Loans / Overdrafts:

  Appropriate for both.

  Unlimited liability may find it difficult to gain loan finance because they are higher risk. If they are able to obtain finance the loan size could be restricted.

  As well, established sole traders may find it easier to gain a bank loan as if the owner (s) fail to repay, the bank can try and obtain payment via personal assets.
• Peer - to - Peer funding:

  Appropriate for both.

  ( But not really for large private and public limited companies ).
• Business Angels:

  Provide capital in return for a proportion of the business so only appropriate for limited liability.
• Crowd Funding:

  Appropriate for both.

  ( But mainly associated with start - ups or small - medium sized businesses ).
• Share Capital:

  Limited Liability.
• Venture Capital:

  Capital invested in return for a share of the business so limited liability.
• Leasing / Trade Credit:

  Appropriate for both.
• Grants:

  Popular for start - ups and smaller businesses so unlimited liability.