Limited and Unlimited Liability – GCSE Business Studies Revision

What’s Liability?

  • Liability is the legal responsibility to pay money owed by your business
  • Unlimited liability means there is no limit to what can be taken from you if it is owed
  • Having limited liability means you are not entirely responsible for the debt of your business

Sole Traders

  • Sole traders / sole propeteriors have UNLIMITED liability
  • They are called ‘sole’ because there’s just one of them – they are the only person in the business
  • The sole trader’s business finance is treated by law as the same thing as the sole trader’s personal finance – there is no business bank account

Sole Trader Advantages

  • They Get ALL the profits! of the business (because they’re the only one in it!)
  • It’s easier to start-up and run than a larger company
  • They get complete control because they’re the boss and they have no staff except themself!
  • They also get more privacy because nobody has the right to look at their accounts

Sole Trader Disadvantages

  • Because their liability is unlimited, it is riskier for them to lose money
  • It can be difficult for a sole trader to grow their business (they could be forever alone…)

Companies

  • A business with more than one person is called a company
  • Companies have LIMITED liability
  • This means the money belonging to the business is treated by law as separate from the money belonging to the owners
  • If the company gets into trouble, the owners can only lose what they’ve invested in the company in the first place… and nothing more: that’s the limit of their liability

Ltd.s and Plc.s

  • The owners of a company are called shareholders
  • There are two types of companies: Plc. and Ltd.
  • Ltd. is a private limited company, and Plc. is a public limited company
  • Public limited companies can sell shares on the stock exchange (this is a source of money), whereas Private limited companies cannot

More on Companies

  • They have to file their accounts with Companies House every year, according to the law
  • These can be seen by anyone who pays a small fee to Companies House
  • Because the owners of a company are its shareholders, the amount of control someone has over the company depends on the percentage of their share
  • The amount of the company’s profit they are entitled to also depends on the percentage of their share
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