Chapter 20
The importance of limited liability
p96-99
Aims for today
1. Look at the difference between limited and
unlimited liability
2. Appreciate the differences between sole
traders and private limited companies
Unlimited liability & Sole traders
What does unlimited liability mean?
Advantages of being a sole trader
• Total control of the business by the owner.
• Cheap and easy to start up – few forms to fill in and to start
trading. ST just has to set up a bank account and inform the
Inland revenue.
• Keep all the profit – as the owner, all the profit belongs to
the sole trader.
• Business affairs are private – competitors cannot see what
you are earning, so will know less about how the business
works and how it succeeds.
A sole trader may have one or more employees. It is the
most common form of ownership in the UK.
Disadvantages of being a sole trader
• Unlimited liability
• Can be difficult to raise finance
• Can be difficult to enjoy economies of scale, i.e. lower
costs per unit due to higher levels of production.
Loosing out on bulk buying compared to larger companies
• There is a problem of continuity if the sole trader
retires or dies – what happens to the business next?
Limited liability
• A limited company is a business that is owned by its
shareholders, run by directors and whose liability is limited.
• Limited liability means that the investors can only lose the
money they have invested and no more. This encourages
people to finance the company....why?
• If anyone claims against the company, “limited liability”
means that they can only recover money from the existing
assets of the business. They cannot claim the personal assets
of the shareholders to recover amounts owed by the
company.
Limited companies
• To set up as a limited company, a company has to register with
Companies House and is issued with a Certificate of Incorporation.
It also needs to have a Memorandum of Association which sets out
what the company has been formed to do, and Articles of
Association which are internal rules of the company.
• Limited companies can either be private limited
companies or public limited companies.
The key difference between the two is that:
• Shares in a public limited company (plc) can be traded on the Stock
Exchange and can be bought by members of the general public.
• Shares in a private limited company are not available to the
general public;
Task 1
• Answer questions on page 98 & 99
Differences between Private Limited
Companies and Sole traders
1. Risk
Limited liability means owing a company is less risky than
being a sole trader. If a business goes wrong, then a sole
trader could loose everything including personal assets
(house, car)
2. Control
A sole trader would be in sole control of his business as he
owns all the shares. In a PLC if there is a majority
shareholder, they have control. In a PLC where
shareholder have a similar % of shares then no one has
control. E.g 30%, 40% and 30% - Consider Dragons Den?
Differences between Private Limited
Companies and Sole traders
3. Profits
Profits from a company are distributed depending upon the
ownership of shares.
Higher number of shares = more profits.
Sole traders retain all their profits.
4. Privacy
PLC must file their accounts each year with a government
agency called COMPANIES HOUSE. These can be viewed by
anyone for a small fee. Sole traders can kept their accounts
private.
Task 2
• Answer questions on page 99
Now for a quick quiz
1.
Does a sole trader have limited or unlimited liability?
2.
Who owns a PLC?
3.
Why is limited liability important to attract investors?
4.
State one disadvantage for setting up as a company?
Paying for accounts to be audited, publishing accounts, loss of privacy
5.
Are all businesses companies?
6.
What are the advantages of being a sole trader?