Liability

• Unlimited liability means that the business owner is personally responsible for the debts of the business.
• Incorporating as a limited company grants limited liability, separating the business from the owner or shareholders.
• Limited liability allows companies to sell shares and attract investors, providing a crucial source of finance.

This module explains the concept of liability and its significance for businesses when raising finance. Initially, small businesses, such as sole traders or partnerships, have unlimited liability, meaning the owner is personally responsible for any debts incurred by the business. However, as a business grows and becomes a limited company, it gains limited liability. This means that the legal duty to pay the business’s debts remains with the company, and shareholders are not personally liable. Limited liability is crucial for companies as it allows them to sell shares and attract investors, who only stand to lose the amount they have invested. This source of finance is not available to sole traders or partnerships.