2.1.2 Liability

• What is liability in business terms?

  Debts and obligations
• In business, liability refers to the debts and obligations that a company owes to others, representing its financial responsibility
• Debt is a key component of liability in business.
• What is an example of a common liability in business?

  Accounts payable
• Match the type of liability with its description:

  Accounts Payable ↔️ Amounts owed to suppliers

  Loans Payable ↔️ Debts owed to lenders

  Wages Payable ↔️ Salaries owed to employees

  Taxes Payable ↔️ Amounts owed to government
• What is the key difference between limited and unlimited liability?

  Personal responsibility
• Unlimited liability means owners are personally responsible for business debts, risking their personal assets
• Limited liability protects the personal assets of business owners.
• What is a primary advantage of limited liability?

  Protection of personal assets
• Limited liability makes it easier to attract investors
• Unlimited liability requires a more complex legal setup than limited liability.

  False
• What type of liability is common in corporations and LLCs?

  Limited liability
• Limited liability protects owners from personal responsibility for business debts beyond their initial investment
• Owners' personal assets are protected in limited liability.
• Match the advantages and disadvantages of limited liability:

  Protection of Personal Assets ↔️ Owners' personal possessions cannot be seized to cover business debts

  More Complex Legal Setup ↔️ Requires more formalities and legal costs to establish

  Attracts Investors ↔️ Easier to raise capital when liability is limited

  Stricter Regulations ↔️ Subject to more oversight and compliance requirements
• What happens to personal assets in unlimited liability if the business fails?

  Assets can be seized
• Investors are more willing to invest in unlimited liability businesses.

  False
• Unlimited liability requires less complex legal formalities
• Match the advantages and disadvantages of unlimited liability:

  Simpler Setup ↔️ Requires less complex legal formalities and costs

  Risk of Personal Asset Loss ↔️ Owners' personal possessions can be seized

  Full Control ↔️ Owners retain complete decision-making power

  Difficulty Raising Capital ↔️ Investors may be reluctant due to liability exposure
• What does 'liability' refer to in business terms?

  Debts and obligations
• An example of a liability is 'accounts payable
• Match the type of liability with its example:

  Accounts Payable ↔️ Owed $10,000 to a supplier

  Loans Payable ↔️ A $50,000 loan from a bank < item2_{e}nd > < pair_{e}nd > < pair_{s}tart > < item1_{s}tart > Wages Payable < item1_{e}nd > < item2_{s}tart >$5,000 owed to employees

  Taxes Payable ↔️ $3,000 owed in income taxes
• What are the two distinct legal structures defining liability?

  Limited and unlimited
• Corporations and LLCs are examples of structures with limited liability
• Sole proprietorships have unlimited liability.
• What is one advantage of limited liability over unlimited liability?

  Greater protection
• One disadvantage of unlimited liability is the risk of personal asset loss
• Match the business structure with its key feature:

  Corporation ↔️ A separate legal entity owned by shareholders

  Limited Liability Company (LLC) ↔️ Combines the benefits of corporations and partnerships

  Limited Partnership (LP) ↔️ General partners have unlimited liability
• Which business structures have unlimited liability?

  Sole proprietorship and general partnership
• Limited liability attracts investors because it lowers the perceived risk
• Order the following aspects based on their favorability for limited liability vs. unlimited liability:

  1️⃣ Investor Interest (Limited Liability: High; Unlimited Liability: Low)

  2️⃣ Loan Terms (Limited Liability: Favorable; Unlimited Liability: Unfavorable)

  3️⃣ Capital Raising (Limited Liability: Easier; Unlimited Liability: Difficult)