T HE I MPORTANCE OF L IMITED L IABILITY Unit 20

T HE B IG P ICTURE This section looks at the different types of business ownership and the affect it may have on the owner(s) of the business.

S ECTION O BJECTIVES To be able to explain the principles of limited and unlimited liability, Understand that the amount that could be lost in the event of a business failure influences the choice of and type of ownership, Appreciate the difference between sole trader and private limited company

K AGAN T ASK Pair and share – When I say find a partner, Using the Rally Robbin, - after 30 seconds thinking time - tell eachother what you already know about the different types of business ownership, Give one of the things that you partner remembered.

K EY T ERMS Sole Trader – the only owner of a business that has unlimited liability Unlimited liability – the legal obligation of the owner of the business to pay off any debts of the business. Limited Liability – when the shareholders of a business are not personally liable for debts of a company but can loose their share value. Companies – businesses whose shareholders have limited liability.

U NLIMITED L IABILITY AND BEING A SOLE TRADER A SOLE TRADER is where ther is only one owner of a business – farmers, plumbers, electricians, hairdressers or shop owners. Sole traders have unlimited liability, this means that they are liable/responsible for the debts of the company. There is no legal difference between the finances of the owner and the business – they are see as one and the same. If the sole trader borrows money for the business he is liable to pay it back

BEING A S OLE TRADER..... Advantages Own boss Total control Greater opportunity for flexible working Keep all profits Easy to set up – few legal requirements Disadvantages Unlimited liability No one to share decision making Lack of specialisation No continuity of existence Time off/holidays Limited finance

L IMITED LIABILITY AND PRIVATE LIMITED COMPANIES The owners of Private limited companies have only LIMITED liability/responsibility for the debts that the business may build up. The finances of the business are legally separate from that of the owners of the business – called shareholders. If the company gets into difficulties then the shareholders may loose the value of their shareholdings but will not be forced to sell their homes to pay the outstanding debts.

B EING A L IMITED / PRIVATE LIMITED COMPANY... Advantages Limited liability Greater availability of finance Specialisation can occur Disadvantages More complicated to set up - legal formalities Loss of individual control

T HE DIFFERENCES BETWEEN THE TWO..... Risk – Sole traders can loose more than Limited Liability companies, sole trader are legally responsible, Limited Companies are not. Control – Sole traders have control over what they do and when. The amount of control in a Limited Liability company will depend on the amount of shares that you have – you need to have more than 50% to have control. Con’t

T HE DIFFERENCES BETWEEN THE TWO..... Profit – Obviously a sole trader gets to keep ALL the profits from the business, a shareholder in a Private Limited Company will have to share the profits with the other shareholders, the only good news is that the more shares that you have the more you get. Privacy – Private Companies, by Law must publish accounts to Companies House at the end of every financial year. These show the value of sales, costs and profit and anyone can see them! A Sole trader has no legal requirement to provide published accounts.

K AGAN LEARNING Quiz, Quiz, Trade Think of questions that we know the answer to about types of Business Ownership, Write down the question and the answer, Ask the question, giving hints until your partner gets it right, Trade (swop) questions, go and find a different partner and repeat as many times as possible

HOMEWORK Section 20 Homework