1.4.3 L IMITED L IABILITY T HE IMPORTANCE OF LIMITED LIABILITY Limited liability v Unlimited liability Sole trader v Private limited company (ltd) The problems of setting up in business!

1.4.3 L IMITED L IABILITY S OLE TRADERS  A sole trader is an individual who owns and runs their own business.  The simplest form of business.  A sole trader has unlimited liability - they are personally responsible for all debts run up by the business.  They could lose their home and all of their assets to pay off any debts that they are unable to pay. Can you define asset and debt?

1.4.3 L IMITED L IABILITY S OLE TRADERS B ENEFITS AND DISADVANTAGES OF BEING A SOLE TRADER Benefits  Cheap and easy to set up  All profits go to you!  Competitors can’t see your accounts  Highly motivated  You are the boss! Drawbacks  Unlimited liability  Limited finance  Difficult to find cover when ill  Few specialist skills – the owner has to do everything or ‘buy in’ expertise A sole trader has to wear a number of ‘hats’ – a variety of jobs! How many hats might a sole trader wear? List all the different jobs a sole trader running a newsagents may have to do.

B ECOMING A SOLE TRADER L IMITED L IABILITY Sarah has always dreamt of being her own boss and at the age of just 22 an opportunity arose. Patricia, the owner of the gift shop where Sarah worked, was due to retire and close the business that she had operated as a sole trader for over 40 years. Sarah wondered whether she had the necessary skills to run the shop herself and finally plucked up the courage to talk to her boss about her buying the shop. Question Time 1.What is meant by the term ‘sole trader’. 2.Explain one advantage of Patricia running the shop as a sole trader. 3.Explain one disadvantage of Patricia running the shop as a sole trader. 4.Identify and explain three skills Sarah would need to operate the shop as a sole trader?

P ROVERBS  Can you work out what proverbs these abbreviations stand for?  APSIAPH  Clue: when things aren’t going to plan do you ever chat to a friend about it?  GMTA  Clue: you and I are thinking the same thing!  FSD  Clue: when is the last time you and a friend had the same silly idea?  TMCSTB  Clue: the soups burnt thanks to everyone involved L IMITED L IABILITY

P RIVATE L IMITED C OMPANIES  Private Limited Companies have Ltd. after the company name.  They can have one or more members e.g. shareholders  They must have at least one director (at least 16 years old)  The shareholders are often family members and have a say in the running of the company Can you define the word shareholder?

1.4.3 L IMITED L IABILITY P RIVATE L IMITED C OMPANIES Private Limited Companies exist in their own right. The owners and the company are separate legal entities. Therefore, the company’s finances are separate from the owner’s personal finances. Shareholders are the owners of Private Limited Companies. Shareholders have limited liability – they are not responsible for the company’s debts. Shareholders can only lose the money that they have invested in the business in the form of shares.

1.4.3 L IMITED L IABILITY P RIVATE L IMITED C OMPANIES Incorporation Private Limited Companies must be registered (Incorporated) at Companies House. They must send to the Registrar of Companies the following: 1. A Memorandum of Association – name, registered office and what the company will do 2. Articles of Association – the rules of running the company They must deliver to Companies House each year a true and fair set of accounts

1.4.3 L IMITED L IABILITY P RIVATE L IMITED C OMPANIES B ENEFITS AND DISADVANTAGES OF BEING A P RIVATE LIMITED COMPANY  Benefits  Limited Liability  Increased sources of finance  More expertise available  Difficult for hostile takeovers to occur  Drawbacks  Competitors can see financial information  Difficult to sell shares for individual shareholders – other shareholders have to agree  Greater legal constraints  Can’t sell shares to the general public Why might one firm want to see the accounts of another?

30 S ECOND C HALLENGE End How many businesses can you name with ltd after its name? L IMITED L IABILITY

T EAM C HALLENGE  Instructions  Split class into teams of 3  Each team should have 3 sheets of paper, preferably 3 different colours  Each sheet represents one type of ownership e.g. blue might be a sole trader, yellow a franchise and red a company  Each team member takes one sheet and writes down something about that type of ownership  Fold it over and pass on to next person  Keep doing this until the sheets have been passed to each person 3 times  Winning  Each sheet should now have 9 statements on it  Count up how many correct but different points have been made  The team with the most points wins L IMITED L IABILITY

2 M INUTE T EST  State 2 advantages of being a sole trader  State 2 disadvantages of being a partnership  What 2 items must a private limited company provide to Companies House?  State 2 benefits of being a private limited company  State 2 stakeholders that will be affected by changing from a sole trader to a Ltd. company End L IMITED L IABILITY

MULTIPLE CHOICE L IMITED L IABILITY 1. Which two of the following would be a reason to set up as a private limited company rather than a sole trader? Select two answers □ A To sell shares on the Stock Exchange □ B Access to increased finance □ C Reduced legal requirements □ D Less expertise available □ E Limited liability