Choosing an Appropriate Legal Structure Flashcards
All 6 cards in this deck
What is unlimited liability?
The business owner is personally responsible for all debts of the business, regardless of the amount owed.
Which legal structures have limited liability and which have unlimited liability?
Private limited companies (ltd) and public limited companies (plc) have limited liability; sole traders and partnerships have unlimited liability.
State one benefit to shareholders of limited liability.
Their personal possessions are not at risk — only the amount of their investment can be lost.
What are the steps to recommend a legal structure for a business?
e.g. a sole trader deciding whether to take on a partner
- State the structure and one benefit for this business: a partner shares the workload and brings new skills.
- Give one drawback: profits must be shared, which may cause resentment.
- Judge using the context: if the partner invests no capital but growth is high, staying a sole trader and employing someone may be better.
Why might a large established business change its structure to a public limited company (plc)?
It can issue shares to the public to raise large amounts of capital for growth, and shareholders keep limited liability.
True or false? A partnership must always share profits equally between the partners.
False. Profit allocation is set out in the deed of partnership and can be unequal.