IGCSE Accounting 0452 - 5.3 Limited Companies

Objective: Understand the meaning of the term limited liability

What is a Limited Company?

A limited company is a type of business structure where the liability of the owners (shareholders) is limited to the amount they have invested in the company.

Understanding Limited Liability

Limited liability is a key characteristic of a limited company. It means that the personal assets of the shareholders are protected from business debts. If the company becomes insolvent (unable to pay its debts), the shareholders will only lose the money they invested in the shares, not their personal possessions like their house, car, or savings.

Key Points about Limited Liability

• Limited to Investment: Shareholders' potential loss is capped at their investment in the company's shares.
• Separate Legal Entity: A limited company is considered a separate legal entity from its owners. This means it can own property, enter into contracts, and be sued in its own name.
• Protection of Personal Assets: This is the primary benefit of forming a limited company.

Contrast with Sole Proprietorship and Partnership

In a sole proprietorship or partnership, the owners have unlimited liability. This means their personal assets are at risk if the business incurs debts.

Example

Imagine you invest £1,000 in shares of a limited company. If the company owes £5,000 to creditors and becomes insolvent, you will only lose your £1,000 investment. Your personal savings and house are protected.

Table Summary

Feature	Sole Proprietorship/Partnership	Limited Company
Liability of Owners	Unlimited	Limited to investment in shares
Legal Status	Not a separate legal entity from the owner(s)	A separate legal entity from its owners
Protection of Personal Assets	No protection	Personal assets are protected

In Conclusion

Limited liability is a significant advantage of choosing to operate a business as a limited company. It provides a crucial layer of financial protection for the owners.