84.

Limited and unlimited liability (Choosing the right business organisation)

1. Missing words
When an entrepreneur first starts up a new business, he or she must decide what legal structure the business should
adopt. Most new businesses start as ________ _____________ (i.e one individual owns and runs the firm). Others
start as ____________________________ where between 2 and 20 people own and run the business. Both sole traders
and partnerships have unlimited liability, this means that there is no distinction drawn between the individual and the
business and therefore if the business collapses, the owners can lose not only the money they invested but also their
__________________ __________________.
Alternatively, an individual can create a separate legal identity for the business by forming a __________________
company.. This means that by law the owners of the business and the company itself are now two different things.
This provides the owners with _______________ ___________________ (i.e. they can only lose what they put into
the business and not personal assets.
(words from: personal assets, limited liability, sole traders, limited, partnerships)

2. Look at the factors below and determine those that would affect which legal structure a new firm should
take.
2.1 The degree of risk associated with the business

2.2 The location of the business

2.3 The amount of finance needed in order to start the business

2.4 The nature of the product

2.5 Whether the entrepreneur wants to keep all decision-making to him/herself

3. Explain
3.1 One type of business that should not start up as a sole trader or partnership.

______________________________________________________________________________________

______________________________________________________________________________________

3.2 Why the support of limited liability can encourage entrepreneurs to be bolder in their risk-taking.

______________________________________________________________________________________

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4. Case study
Boris Borisko has decided to open a Russian restaurant in Clapham. His father has agreed to lend him £100,000 and he
thinks he will need an extra £50,000 which he intends to borrow from the bank.

4.1 Which type of legal structure do you think would be suitable for this business venture? Explain your answer.

______________________________________________________________________________________

______________________________________________________________________________________

4.2 Boris has thought about giving all his staff a share stake in the business. Given the small size of the business,
which business organisation would work best for this?

______________________________________________________________________________________

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