2.1.3 - Liability

• Define limited liability:

  • means that a business owner is only liable for their original investment should the business fall into debt, their personal possessions are not at risk.
• Define unlimited liability:

  • means that if the business has debts the owner must pay even if this means selling their own possessions to cover the debt.
• Implications of unlimited liability:

  • sole trader and partnerships have unlimited liability.
  • if business gets into financial trouble a sole trader or partnership business may have to sell their own assets (like a family car) to pay debts.
• Implications of limited liability:

  • the owner and business have legal separate identities so can sue or be sued separately.
  • there is the protection of the owners personal savings, in the event of business collapse.
• Finance suitable for an unlimited liability business:

  • loans from the bank
  • private investors
  • credit cards
  • crowd funding from websites
  • trade credit from suppliers
  • owners savings
  • overdraft
• Finance suitable for an limited liability business:

  • retained profit
  • sale of assets
  • ordinary and preference share issues
  • government grants
  • venture capital