Chapter 28- Liability

Question 1

Unlimited liability

Answer 1

A business model where the owners are liable for all business debts – there is no legal difference between the owners and the business

• Business owners with unlimited liability are exposed financially to the failure of their business – if their business collapses while owing money to external parties, such as banks, suppliers and the tax authorities, the owners will have to meet these debts from their personal recourses
• Owners of businesses with unlimited liability are also liable for any
  unlawful acts committed by the owners or the employees
• Businesses with unlimited liability find it easier to raise finance, this is
  because lenders will be reimbursed if a business defaults – unlimited
  liability businesses are often also seen as more credible

Appropriate finance:

• Personal finance
• Mortgage
• Unsecured bank loans
• Peer-peer
• Grants
• Crowd funding

Question 2

Limited liability

Answer 2

A legal status that means that shareholders can only lose the amount originally inputted to the business

• The main advantage is that the owners of businesses with limited liability
  are shareholders – the main advantage of this is that shareholders’
  financial liability is limited to the amount of money they invested in the
  business
• If a limited company collapses, the owners’ private assets are fully
  protected – shareholders cannot be legally forced to sell personal assets
  to meet the business’s debts.
• Because shareholder’s private assets are protected, limited companies
  may find it easier to raise larger amount of money from investors – as a
  result investors are more willing to buy shared in limited companies
  because they know precisely the extent of their liability is limited to the size
  of their investment

Question 3

Collateral

Answer 3

An asset that might be sold to pay a lender when a loan cannot be repaid

Question 4

Incorporated business

Answer 4

A business model in which the business and the owners have a separate legal identity

Question 5

Long term finance

Answer 5

money borrowed for more than one year

Question 6

Right issue

Answer 6

issuing new shares to existing shareholders at a discount

Question 7

Unincorporated business

Answer 7

A business where the business and the owners have the same legal identity