213 LiabilityAS Edexcel New Specification 2015 Business

By Mrs Hilton for

Lesson Objectives

• To be able to discuss unlimited liability and its implications

• To be able to discuss limited liability and its implications

• To be able to identify appropriate finance for limited liability

• To be able to identify appropriate finance for unlimited liability

• To be able to answer sample exam questions based on the topic area

From the specification

a) Implications of limited and unlimited liabilityb) Finance appropriate for limited and unlimited liability businesses

Guidance from Edexcel

Starter

• Limited or unlimited liability which is this a definition of?

• Company directors aren’t personally responsible for debts the business can’t pay if it goes wrong, as long as they haven’t broken the law.

Definition of limited and unlimited liability

• Limited liability is: where a business owner is only liable for their original investment should the business fall into debt. The business and the owner have separate legal identities. PLC and LTD

• Unlimited liability is: If a business has debts the owner must pay even if this means selling their own possessions to find the money. Sole trader and partnerships

IMPLICATIONS OF LIMITED AND UNLIMITED LIABILITY

Implications of limited liability• The owner and the business have separate legal identities so

can sue or be sued separately• The owner and the business can own separate assets• The business can now sell parts of the business called shares

to shareholders• There is protection of the owners personal savings and assets,

in the event of debts or business collapse, the owners cannot be made to sell their personal possessions (like a house) to pay the debts of the business off. The owners would only lose their original investment in the business and no more.

• To qualify for protection a business must be registered with companies house as a ltd or plc.

Implications of unlimited liability

• Sole trader or partners may have to sell their own assets (like a family car) to pay the debts of the business

• They are unable to sell shares in the business• However they may be able to secure finance

due to the fact that they are demonstrating to a bank that they are prepared to risk their own finances on the business

FINANCE APPROPRIATE FOR LIMITED AND UNLIMITED LIABILITY BUSINESSES

Finance for an unlimited liability business

• Business loan• Private investors• Credit cards• Crowd funding• Trade credit• Owners savings• overdraft

Finance for a limited liability business

• Retained profit• Sale of assets• Debentures (loan on a specific item like a machine, asset

cannot be sold without debenture holders permission)• Ordinary and preference shares• Hire purchase and leasing• Trade credit• Government grants• Venture capital

Sample questions

Sample question 1

6 mark questionCase on next slide

Level Mark Descriptor Possible answer

1 1 Knowledge Limited liability is where the owners of a business are not liable for any debts beyond what they have invested in the company

2 2 Applicatione.g. about Fitness Retreat Ltd

Marvin would not lose his personal possessions in the events of business failure

3 3-4 Analysise.g. a consequence of Fitness Retreat ltd of having limited liability

Shareholders are more willing to invest in the company – less of a risk financially if it fails

4 5-6 Evaluatione.g. arguments that limited liability might not be that important

Limited liability might not be that important for this business as banks may be likely to invest due to celebrity status and innovative ideaOrBanks may not invest as Marvin is not risking any of his own money rather than the capital invested

Series of videos

• Don’t just sit passive through the videos, make notes, pause them to review the information and ask if you have any questions…

Revision Video

https://www.youtube.com/watch?v=9vay3291XAY

Glossary

• Limited liability; If the business has debts the owners are only liable for the amount of their original investment

• Unlimited liability; If the business has debts the owners are liable for the full amount and may need to sell their own assets to cover payments