Liability

Question 1

Define LIABILITY

Answer 1

Liability is the state of being legally responsible for something.

Question 2

Define UNLIMITED LIABILITY

Answer 2

Unlimited liability is where the owners and the business are not legally seperate. The owner is responsible for all liabilities of the business and owns all assets. They can be known as unincorporated businesses.

Question 3

What are the implications of unlimited liability?

Answer 3

• Owners are financially exposed to the failing of the business
• Owners may be forced to sell of personal assets in order to cover business debts
• The owners are liable for any unlawful acts committed by staff
• May not pay corporation tax

Question 4

Define LIMITED LIABILITY

Answer 4

Limited liability is where an investor’s liability/commitment is limited to the amount invested or promised in share capital. The investor’s personal belongings are protected beyond this.

Question 5

What are the implications of limited liability?

Answer 5

• Shareholders cannot legally be forced to sell personal assets to cover business debts.
• More likely to pay corporation tax
• May be easy to find finance as the amount of liability is known.