Topic 1.4: Making the start-up effective
Chapter 20: The importance of limited liability
1
What is meant by the term ‘sole trader’?
2
What is meant by the term ‘limited liability’?
3
What is meant by the term ‘unlimited liability’?
4
What is meant by the term ‘shareholder’?
5
What is meant by a ‘limited company’?
6
Explain how the day-to-day control in a sole trader differs from the control in a
limited company.
7
Is unlimited liability likely to be less risky than limited liability for the owner of a
business? Explain your answer.
Jane Cowell set up as an interior decorator operating as a sole trader. She invested
£20,000 of her own money to get it going. She now owes £50,000 to suppliers.
8
If Jane closed the business how much might she lose? Explain your answer.
9
If Jane had set up as a limited company called JC Ltd how much might she
lose? Explain your answer.
10 Explain two reasons why John Rudd, setting up as a fishmonger, might be better
off as a sole trader than a limited company.
© Pearson Education Ltd 2009
Edexcel GCSE Business Studies
page 1
Topic 1.4: Making the start-up effective
Suggested answers
1 A sole trader is a business where there is only one owner who makes all the decisions about the
business, gets all the profit and is personally responsible for all the debts of the business.
2 Limited liability is where owners (shareholders) are liable (responsible) only for the amount of
money he or she has put into the company. They are not personally liable for debts.
3 Unlimited liability is where the business owner is always responsible for the debts of the business.
He or she has a legal obligation to settle all debts. There is no limit to their responsibility.
4 A shareholder is someone who has invested in a company and therefore part, owns it. The
percentage owned depends on their share ownership. The shareholders are the owners of
limited companies.
5 A limited company is a business which is owned by shareholders, who have limited liability.
6 The sole trader has more control over day-to-day operations, e.g. hours worked than in a
limited company. The sole trader does not have to file accounts for public scrutiny. The sole
trader keeps all the profit whereas a limited company has to split the profits between the
shareholders. In a limited company control may be shared between the shareholders who may
not all agree on decisions/direction.
7 No. Having limited liability is less risky because the owners only risk losing what they have
agreed to put into the business. If the business does badly they can only lose the value of their
shares. Unlimited liability is far more risky, as the owners stand to lose the money they have put
in and have to pay off debts even if it means they have to sell their personal assets to raise the
money.
8 Jane would lose £70,000. This would comprise the £20,000 she invested plus she still owes the
£50,000 even though she has closed the business. It is Jane who owes the money not the
business.
9 Jane would lose £20,000. This is the money she invested. She would not have to pay the money
owed to the suppliers as the business owed that debt, not Jane herself. Her liability is limited to
the amount she agreed to put into the business.
10 The fishmonger is likely to be a small business with not much to pay out for machinery or
supplies. As such he will not need much external finance, i.e. other investors. He may want to
maintain his privacy. So by being a sole trader he will not have to publish accounts. He may
want to work flexible hours. As a sole trader he can decide for himself what hours he works.
Also, whatever profit he makes, he keeps. Sole traders may find it easier to get trade credit
than limited companies because they are liable for debts and so the creditor can expect them
to have to sell off personal possessions to pay off debts. There may be some tax advantages to
being a sole trader and in addition, the sole trader can take money out of the business
whenever they want (assuming there is money there to access).
© Pearson Education Ltd 2009
Edexcel GCSE Business Studies
page 2