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Raising Finance

Liability

  • 3 things to know
  • Paper 2 and Paper 3

Overview

Unlimited and limited liability, what each means for an owner's personal assets, and how liability shapes the finance a business can raise.

What you need to know

Answer each one before you reveal it.

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Key term

Distinguish unlimited from limited liability.

Evaluation

How does limited liability affect how a business raises finance?

Key term

Name two short-term finance options available to both limited and unlimited liability businesses.

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    What is meant by unlimited liability?

    Model answer

    The business owner is personally responsible for all debts of the business, with no legal distinction between personal and business assets.

  2. 2

    Define limited liability.

    Model answer

    The owners' financial responsibility for business debts is restricted to the amount they have invested in the business.

  3. 3

    What can happen to a sole trader's personal assets if their business cannot pay its debts?

    Model answer

    Creditors can claim the owner's personal assets such as their house, car, and savings.

  4. 4

    Explain what shareholders stand to lose if a limited company fails.

    Model answer

    Shareholders can only lose the value of their shares, not their personal possessions.

  5. 5

    Which types of business structure typically have unlimited liability?

    Model answer

    Sole traders and partnerships.

  6. 6

    Which types of business structure have limited liability?

    Model answer

    Private limited companies (Ltd) and public limited companies (plc).

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