Revision Diary 8 - Types of Business Structure & Unlimited liability

What does unlimited liability mean for the entrepreneur?

Every business will eventually accrue (collect) debts from START UP COSTS, FIXED & VARIABLE COSTS and will probably have CREDIT accounts with all its suppliers, which means it needs to pay for the materials that it has had.  

If the REVENUE (SALES) dry up then the business may struggle to pay back its DEBTS.  At the point that the business cant carry on the OWNER may decide it is no longer worth trying.  When this happens there is still the problem of UNPAID BILLS.  These debts owed to the business's CREDITORS still have to be paid .
The OWNER of the business is LIABLE for the debts that they have built up.  Even when the business fails they will need to settle the bills. UNLIMITED LIABILITY is a very old law that states the person has to sell whatever they can to ensure that the BILLS get paid. ALL the owners personal possessions will need to be sold until the debts are paid..

BANKRUPTCY occurs when the business is not likely to PAY BACK its debts. Once this occurs the business has to stop trading the ASSETS are all ceased and the court will instruct who gets paid what.  The BANKRUPT person will not be able to operate another business for several years but the debts will be cleared.  Sadly they may struggle to be able to borrow any money in the future.  

SOLE TRADERS - This is a single person who sets up a business on their own.  If TWO or more people set up in business together this is known as a PARTNERSHIP.

Benefits of a PARTNERSHIP

• The partners may have more funds to put into the business than a single entrepreneur.
• PARTNERS can give each other morale support and discuss ideas and solutions to problems.
• The partners will have a greater range of skills than one person on his or her own.
• The partnership has a greater flexibility to cover if one partner is on holiday or ill

To find out more about BANKRUPTCY here and here  Interestingly business failure in the UK is still seen as PERSONAL FAILURE whereas in other countries such as the USA it is viewed as a learning opportunity! 

Quick Quiz

1. What is meant by 'unlimited liability'?
2. Give TWO ways an entrepreneur may loose money when a business fails?
3. Why are banks often reluctant to lend money to new businesses?
4. What is VOLUNTARY bankruptcy?
5. What is leasing?
6. Explain why creditors may not wish to declare a poor payer bankrupt?
7. Why might an entrepreneur still find it difficult to pay bills even if the business is selling many goods?
8. Does bankruptcy mean that an entrepreneur has failed?
9. Discuss with someone in the class if the risks of starting a business are greater than the possible rewards.  

Worksheet
start up failures
limited and unlimited liability

9 mark question click here