Liability (Edexcel A Level Business): Revision Note

Sole proprietors and partnership owners are fully responsible for all debts owed by the business

Owners are also legally responsible for any unlawful acts committed by those connected to the business

There is no legal distinction between owners with unlimited liability and the business

As a result, these business owners may have to use their own  personal assets to pay debts or legal fees

E.g. a sole proprietor may need to sell their home to pay  creditors if their business fails

Owners (shareholders) of private limited companies and public limited companies can only lose the original amount they invested in the business if it fails

Shareholders are not responsible for business debts

In most cases, the shareholders cannot be held responsible for unlawful acts committed by those connected with the business

Companies are  incorporated, and owners are considered a separate legal entity from the business 

This means that if a company fails, the owners would lose their investment (shares) but would not have to use their assets to meet additional debts or legal fees

E.g. in 2018, construction company Carillion entered liquidation, and the shareholders lost their investments

Capital expenditure on buildings and expensive equipment will usually require a longer-term method of finance, such as a mortgage or the issuing of shares

Revenue expenditure (e.g. purchasing raw materials or paying business rates)  is likely to be funded through a short-term method such as trade credit or an overdraft

For quick, short-term finance, businesses may use methods such as overdrafts, trade credit, short-term loans or leasing

If a business needs access to finance over the longer term, methods such as a share issue, debentures, mortgages or grants may be more suitable

Start-ups or struggling businesses may find their choice of finance limited

• They will often pay much more to access financing than more established, stable businesses

Businesses that present more of a risk to lenders may choose to raise finance through venture capitalists, business angels or crowdfunding

Unlimited liability businesses, as well as businesses that own few assets, often struggle to raise finance, as they’re seen as risky

Methods of finance that attract interest, e.g. loans, mortgages and overdrafts, are less affordable for businesses when interest rates are high

Interest-free methods of finance are usually more complex to access, e.g. share issues and grants

Unlimited liability businesses often struggle to raise finance

• They may be small, own few business assets (i.e. to use as collateral) or have a limited trading record

Lenders (e.g. banks) prefer to lend to more established businesses that own assets

Investors prefer to invest in limited companies, as the investors are often able to obtain a share in the business