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The Importance of Limited Liability

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Harvey Spence

on 18 December 2012

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Transcript of The Importance of Limited Liability

By Harvey Spence
and Arun Pahwa The Importance of
Limited Liability Unlimited Liability Limited liability Being a sole proprietor means that you are the only owner of your business. The turn 'unlimited liability' means that the sole traders are completely responsible for paying all the debts of their business.
One feature of unlimited liability is that there are no legal differences between the sole trader's finance and the finance of the business.
However, this has disadvantages - if the sole trader of the business borrowed money for the good of the business, then they would be responsible for paying back the loan. If the loan could not be payed back, then they might be forced to sell their own personal possessions in order to pay it back, such as their house. Unlimited Liability (continued) Unlimited liability therefore creates personal risk for sole traders. If their business fails, then the sole trader is personally responsible for the losses of the business.
However, most business start-ups choose to become sole traders. This is because it is easy to set up and run compared to other forms of business. Sole traders do not have to share ownership of the business with anyone else. All the profits of the business go to the sole trader and they have complete control of the business. Limited liability allows shareholders of a company not to be personally liable for the debts of the company: the most they can lose is the value of their investment in the shares of the company.
Private limited companies have limited liability. This means that the owners of the business are only partly responsible for repaying any debts of the business. It also means that the finances of the business are legally separate from the finances of the owners of the business.
In the UK, businesses that have limited liability are called companies. The owners are called shareholders. There must be at least one shareholder in a private limited company. Shareholders have limited liability. If the company gets into financial difficulties the shareholders can lose what they invested but nothing more. Then they are not personally liable for any more of the debts of the company. Differences between Sole Traders and Private Limited Companies Risk If things go badly for a sole trader, they can at worst lose everything they own, including their personal assets like their house. However, if things go badly for a limited liability company, the owners can only lose the value of their shares in the company. Control Real life examples Control of the private limited company depends upon the proportion of shares owned by the shareholder. If the owner of the company owned 80 per cent of the shares, then they would have control of the business because they have most of the shares. Whereas if the owner owns fewer shares, then the owner is not necessarily in control of the business. Profits Partnership -
CityCas Chartered Acc. - Is a British multinational chartered accountants company founded by Sanjiv Pahwa

Sole Traders -

Private Limited Liability -

New Look is a British global fashion retailer with a chain of high street shops in the UK, Belgium, France, The Netherlands, the Republic of Ireland, Malta, Singapore, United Arab Emirates, Azerbaijan and Poland.

Virgin Group Ltd. is a British multinational branded venture capital conglomerate company founded by business tycoon Richard Branson. Its core business areas are travel, entertainment and lifestyle and it consists of more than 400 companies worldwide. Profits of a company are often distributed according to the proportion of shares owned. With sole traders, they get all the profits because they are he only owner of their business. However, if a shareholder owns 80 per cent of the shares, then they will get 80 per cent of the profit. Privacy Private limited companies, by law, must file their accounts each year with an agency of government called Companies House. These accounts can then be seen by anyone who asks and pays a small fee to Companies House to see them. In comparison, no private individual or business has a right to see the accounts of a sole trader. So being a sole trader gives owners more privacy than being a limited company.
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