Limited vs Unlimited Liability Businesses
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Questions and Answers

What type of business has a legal identity separate from its owners?

  • Sole trader
  • Partnership
  • Limited liability business (correct)
  • Unlimited liability business

    • Owners of unlimited liability businesses can be held personally responsible for business debts.

    True

    What is one major risk associated with unlimited liability for business owners?

    Personal asset loss

    In unlimited liability businesses, owners are liable for ___ acts committed by the business or employees.

    <p>unlawful</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Unlimited Liability = No legal separation between owner and business Limited Liability = Legal identity separate from its owners Sole Trader = A type of business owned by one person Incorporated Business = A business that has limited liability for its owners</p> Signup and view all the answers

    Which of the following is NOT a characteristic of a limited liability business?

    <p>Owners can be sued personally</p> Signup and view all the answers

    Which of the following is NOT a source of finance suitable for unlimited liability businesses?

    <p>Share capital</p> Signup and view all the answers

    Crowd funding is considered a short-term finance option for businesses.

    <p>False</p> Signup and view all the answers

    What is one reason why unlimited liability businesses may struggle to raise finance?

    <p>They have fewer assets that can be used as collateral.</p> Signup and view all the answers

    Limited liability businesses have access to finance methods such as _____ and debentures.

    <p>shares</p> Signup and view all the answers

    Match the source of finance to its key feature:

    <p>Peer-to-peer lending = Can avoid banks Crowd funding = Long-term finance option Bank overdraft = Variable limit based on business success Grants = Free source of finance requiring qualification</p> Signup and view all the answers

    Which statement accurately describes limited liability businesses compared to unlimited liability businesses?

    <p>They tend to be larger and have more resources.</p> Signup and view all the answers

    What is the primary financial liability of shareholders in a limited company?

    <p>Limited to the amount they invested</p> Signup and view all the answers

    Shareholders can be forced to sell their personal assets to pay a limited company's debts.

    <p>False</p> Signup and view all the answers

    What must a business maintain to keep its shareholders protected from liability?

    <p>Adequate records and accounts</p> Signup and view all the answers

    In a limited company, shareholders' liability is limited to the amount they __________ for their shares.

    <p>paid</p> Signup and view all the answers

    Match the type of finance with its duration:

    <p>Mortgages = Up to 25 years Unsecured bank loans = 1 to 5 years Debentures = Up to 30 years Share capital = Permanent capital</p> Signup and view all the answers

    Which method of finance is considered long-term and is never repaid?

    <p>Share capital</p> Signup and view all the answers

    Limited companies typically find it easier to raise larger amounts of money from investors.

    <p>True</p> Signup and view all the answers

    Name one factor that can influence the method of finance chosen by a business.

    <p>Financial position of the business</p> Signup and view all the answers

    Which type of expenditure is usually funded by long-term sources of finance?

    <p>Heavy capital expenditure</p> Signup and view all the answers

    Unsecured bank loans are more likely to be granted during a credit crunch.

    <p>False</p> Signup and view all the answers

    Name one personal source of finance commonly used by unlimited liability businesses.

    <p>Personal savings</p> Signup and view all the answers

    Unlimited liability businesses are more likely to use __________ as collateral for business loans.

    <p>the owner's house</p> Signup and view all the answers

    Match the type of finance with its appropriate description:

    <p>Personal savings = Owner's funds used for startup Retained profit = Profits reinvested in the business Mortgage = Loan secured by real estate Unsecured bank loans = Loans without collateral requirement</p> Signup and view all the answers

    What is a common consequence of relying on personal savings for funding a business?

    <p>Increased risk of losing personal assets</p> Signup and view all the answers

    Revenue expenditure is typically financed through long-term sources.

    <p>False</p> Signup and view all the answers

    What financial risk do owners of unlimited liability businesses face when using a mortgage?

    <p>Risk of losing their homes</p> Signup and view all the answers

    Businesses tend to prefer finance sources that incur __________ costs.

    <p>lower</p> Signup and view all the answers

    What might limit the use of retained profit in unlimited liability businesses?

    <p>Low profit generation</p> Signup and view all the answers

    Study Notes

    Limited Liability vs. Unlimited Liability Businesses

    • Unlimited Liability: No legal difference between the business and its owners. Owners are personally responsible for all business debts. If the business fails, owners must use their personal assets to pay off debts. This is common in smaller businesses like sole proprietorships and partnerships.
    • Limited Liability: Businesses have a separate legal identity from their owners (shareholders or owners). The liability/responsibility of the owners is restricted to the amount they invested in the business. If the business fails, personal assets of the owners are protected.

    Advantages/Disadvantages of Unlimited Liability

    • Disadvantages:
      • Owners are fully liable for all business debts.
      • Personal assets can be used to repay business debts, even when they are not enough.
      • Owners are responsible for any actions of employees, even illegal ones.
    • Advantages (typically not explicitly mentioned):
      • Simpler structure due to fewer legal formalities.
      • Easier to establish, as there are less stringent procedures needed.

    Advantages/Disadvantages of Limited Liability

    • Advantages:
      • Owners' personal assets are protected from business debts.
      • Easier to raise capital–more investors are willing as risk is lower.
    • Disadvantages:
      • More complex structure.
      • More stringent legal procedures and requirements.

    Sources of Finance for Unlimited Liability Businesses

    • Personal savings: Common for startups.
    • Retained profits: Profit can be reinvested if business is successful.
    • Mortgages: Using personal home as collateral for loans.
    • Bank loans/unsecured loans: Possible but can be difficult to obtain if business is not established.
    • Peer-to-peer lending (P2PL): Borrowing from individuals through websites.
    • Crowd-funding: Raising capital through online platforms.
    • Bank overdrafts: Short-term financing available from a bank.
    • Grants: Funding from government or organizations, but often challenging to obtain.

    Sources of Finance for Limited Liability Businesses

    • Share capital: Selling shares to raise substantial capital; investors are more likely to be interested.
    • Debentures: Long-term loans that are secured by the company.
    • Retained profit: Profits can be reinvested enabling ongoing growth.
    • Venture capitalists: Large investors who take equity in the company.
    • Business angels: Individual investors, often specializing in startups.

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    Related Documents

    Limited and Unlimited Liability Businesses PDF

    Description

    Explore the key differences between limited and unlimited liability businesses in this quiz. Understand the implications for business owners regarding personal assets and responsibilities. Test your knowledge on the advantages and disadvantages of each type of liability.

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