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Liability

The definition of liability is ‘the state of being legally responsible for something’.

Tring School has liability of you during school hours - we are legally responsible for your safety during this time.

Tesco has liability over customers when they are in their stores - if they have an accident, Tesco is liable for any repercussions (i.e. you could sue them!).

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Choices for business start ups

Sole trader
Partnership
Private Limited Company (Ltd.)
Franchise

Once a business becomes large, it may choose to become a Public Limited Company (PLC).

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Sole traders and partnerships

The most common in the UK.
Mainly for small businesses, such as plumbers and hairdressers.
It is the cheapest (you don’t need to pay for an accountant to do your accounts).
It is the most private (you don’t have to publicly declare your income/profits).
However, you have unlimited liability - any debts your company create belong to the owner, and their own property and other assets are at risk if the business fails and the creditors seek to recover the debt from you.
The owner pays income tax, not corporation tax.

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Bankruptcy and Liability

There is a difference between a business going into liquidation and an individual being made bankrupt.

When a company goes under, and independent accountant is appointed to try and raise as much cash as possible to repay the firm’s debts. This is called administration.

If the company has limited liability, it means the business and the shareholders are separate legal entities. If there is a shortfall between the debt and what can be paid, the shareholders do not have to repay the debts - the losses to the shareholders are limited to what they have invested in the company.

Limited companies (those with Ltd. after their name) have limited liability.

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Limited Liability - becoming a private limited company

To achieve limited liability, a company must register with Companies House and pay around £150 and become a private or public limited company.

If it is a private limited company they use Ltd after its company name.

The company must keep accurate financial records, and have their accounts drawn up every year by a professional accountant (which can cost about £2000 a year).

All the details are kept by Companies House, and can be looked at by anyone who wishes to know.

The private part of the name does not mean there is any sort of secrecy, it just means that people can’t buy shares in the business unless they know the current owners.

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Private Limited Companies

Most businesses on Dragon’s Den are private limited companies.
These use Ltd after their name.
These give owners limited liability - the business and the owners are separate legal entities. Therefore there is less risk to owners.
The business has shares, but an investor can’t buy these unless you know the current owners. You can have as many shareholders as you like.
Any profits may be paid out to shareholders - this is called a dividend.
You must pay for an accountant to prepare your accounts each year, and your accounts are held by Companies House so they are not private - people can find how much profit they made.
The business pays corporation tax, not income tax

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	Advantages	Disadvantages
Sole trader	Can start trading immediately Cheap and easy to set up Have 100% control Keep all of the profits	Unlimited (personal) liability holidays and sickness are a problem Limited financial resources
Partnership	Liability is spread between the partners Complementary skills may enhance the business Workload can be shared	Unlimited liability, including for business debts caused by partner Profit must be shared There may be clashes as one partner seeks overall control
Private limited company	Limited liability Selling shares is a good source of long term finance Can sell shares to friends and family (and decide who is able to buy shares	Risk of losing control to shareholders Shares can’t be offered for sale on stock market so still less finance available than a public limited company Must provide accounts to Companies House so the financial performance of the business can be seen by competitors Cost of starting up and cost of getting accounts audited every year

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The government website on setting up a private limited company

https://www.gov.uk/set-up-limited-company

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Ownership and types of liability

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Key words

Limited liability

The owner and the business are separate legal entities. The debts of the business do not belong to the owner, and the owner’s personal assets (such as a house) are not at risk if the business fails.

Unlimited liability

The owner and the business are not separate legal entities - in the eyes of the law they are identical . The debts of the business belong to the owner.

Sole trader

A business run by one person, who has unlimited liability for any business debts

Partnership

Several entrepreneurs join together to form an organisation with unlimited liability.

Private limited company

A small family business in which shareholders enjoy limited liability

Shareholders

People who have bought shares in a limited company

Dividend

The payment made to shareholders from the profits of a limited company

Bankrupt

When an individual is unable to pay their debts, even after all personal assets have been sold for cash

Liquidation

A company has to stop trading, sell all its assets and repay its debts