Liability 2.1.3

Liability - is a company's financial debt or obligations that arise during the course of its business

Limited liability - An investor's liability/financial commitment is limited to the total amount invested or promised in share capital. An investor's personal belongings beyond this venture are protected.

Unlimited liability - The owners of a business are responsible for the total amount of debt of the business. The owner may lose their personal belongings, e.g. home and cars, if the value of these is needed to cover the debts of the business. UNLIMITED LIABILITY IS SEEN AS A HIGH RISK

Incorporated - An incorporated business (also called a corporation) is a type of business that offers many benefits over being a sole proprietor or partnership, including liability protection and additional tax deductions. Forming a corporation also allows you raise capital through sale of shares of your company.

Creditors - is owed money, either by a business or an individual for providing supplies or finance.

Debtors - a person or business that owes money to a creditor. Unlimited liability should mean that credit is easier to obtain as suppliers have a greater chance of getting their money back if things go wrong.

Insolvency - occurs when a company cannot pay its debts because it is making a loss.

Liquidation - occurs when a business is clearly insolvent and has to close down. Its assets are sold to raise cash that is used to pay at least some of the debts

An incorporated business (also called a corporation) is a type of business that offers many benefits over being a sole proprietor or partnership, including liability protection and additional tax deductions. Forming a corporation also allows you raise capital through sale of shares of your company. 

1. Sole traders and partnerships have unlimited liability; they can set up in business without meeting any special legal requirements. The owners have a legal duty to repay all debts and can have all of their personal possessions seized to pay the debts.
2. Limited companies are legal entities, set up under company law. Their liability is limited to the business itself and not the owners/shareholders. Limited companies are required by law to include 'Ltd' at the end of their name if they are a private company and 'PLC' if they are a public company.
3. Private limited companies can have up to 50 shareholders but shares cannot be bought or sold without the consent of all the other shareholders, and they cannot be bought on the Stock Exchange. This suits small and medium sized enterprises and family businesses, although some large companies choose to remain private.
4. Public limited companies (PLCs) can be financed by shares offered to the general public (equity finance)

UNLIMITED LIABILITY 

A creditor can pursue a sole trader or partnership through the courts to get their money back. In which case the debtor may be forced to sell personal assets such as a house or vehicles as well as own personal savings to pay off the debt.

LIMITED LIABILITY 

• The owners of both the private and public companies are the shareholders. What they have in common is that the liability of the owners for the debts of their companies is limited.
• The company itself is a legal entity and as such is responsible for any debts.
• The owner's liability is limited to the value of the shares they own and in turn, this is limited to the amount that they paid for the shares when they bought them.
  
• The company may lose its assets but the personal wealth of the owners is protected. Shareholders are protected by the law and lose only the money they put into the business.
• When a company becomes insolvent, it ceases to trade and is liquidated.

IMPLICATIONS OF LIMITED AND UNLIMITED LIABILITY 

Suppliers dealing with limited companies may run more risks than they do when selling to sole traders and partnerships.

1.  If a limited company becomes insolvent, suppliers may not get paid, customers may lose their deposits and guarantees will be worthless. After-sales will no longer be available. Employees may find themselves redundant and perhaps not being paid for work done.
2. Suppliers and customers may lose large sums each year.
3. To avoid the risks, most lenders negotiating with a small business will insist on director's guarantees before parting with any money.

 FINANCE APPROPRIATE FOR LIMITED AND UNLIMITED LIABILITY BUSINESSES

• Share capital is available to limited companies but not to sole traders and partnerships
• Private limited companies can get equity (share) finance from individuals, usually themselves and people they know personally. A small group of shareholders can keep control of the business; this is why a few big businesses stay private long after they could have gone public.
• Share capital is ideal for big businesses. Using their reputations, they can raise large sums for capital investment, without having to pay it back or pay interest. Shareholders will expect dividends but not when trading conditions are difficult and profits low or worse. PLCs can sell shares on the Stock Exchange.