Business Ownership and Liability Flashcards
(30 cards)
What does bankrupt mean?
When an individual is unable to pay their debts, even after all personal assets have been sold for cash.
What does sole trader mean?
A business run by one person; that
person has unlimited liability for any business debts.
What does limited liability mean?
Restricting the losses suffered
by owners/shareholders to the sum they invested in the business.
What does unlimited liability mean?
Treating the business and the individual owner as inseparable, therefore making the individual responsible for all the debts of a failed business.
What does private limited company mean?
A small family business in which shareholders enjoy limited liability.
What is the main difference between a company going into liquidation and an individual being made bankrupt?
A company going into liquidation involves an independent accountant trying to repay debts, while an individual in bankruptcy may lose personal assets.
What is meant by limited liability?
Limited liability restricts the losses of shareholders to the amount they invested in the business.
What happens to shareholders in a company with limited liability if the company incurs debts?
Shareholders are not personally liable for the debts; their losses are limited to their investment.
What is an example of a financial disaster for a business with unlimited liability?
An owner could lose personal possessions such as their house or car due to unpaid business debts.
What is required to achieve limited liability for a business?
A business must be established as a company through an application to Companies House and a payment of around £150.
What must small limited companies include in their name?
The letters ‘Ltd’ at the end of the company name.
List some benefits of becoming a limited company.
- Ability to have share capital
- Easier to raise additional capital
- Continuity of existence
- Limited liability encourages investment
Why might many businesses in the UK not convert to limited companies?
Owners may believe that nothing will go wrong or that they can manage financially if issues arise.
What is a sole trader?
A business run by one person who has unlimited liability for any business debts.
What is unlimited liability?
Unlimited liability means the business and the individual owner are treated as one, making the owner fully responsible for all debts.
What is a key reason for a business to consider forming a limited company?
To limit personal financial risk, especially if borrowing money to finance the business.
What are some advantages of being a sole trader?
- Can start trading immediately
- Have 100% control
What are some disadvantages of being a sole trader?
- Unlimited personal liability
- Full responsibility for the business
What are some advantages of a partnership?
- Liability is spread among partners
- Complementary skills may enhance the business
What are some disadvantages of partnerships?
- Unlimited liability for business debts
- Potential clashes for control
What are the advantages of a limited company?
- Limited liability
- Ability to sell shares
What are some disadvantages of a limited company?
- Risk of losing control
- Costs of starting up and auditing
Define bankruptcy.
Bankruptcy occurs when an individual is unable to pay their debts, even after selling personal assets.
