★ Must-know
📌 A sole trader or partnership has no separate legal identity from its owner or owners, whereas incorporation creates a separate company responsible for its own debts and liabilities.
Further detail
Unlimited liability puts personal possessions at risk; limited liability protects them.
1. A sole trader cannot repay a business loan, and the business has no assets left. What may happen to the owner's personal possessions?
2. An owner invests $20,000 in a company that later cannot pay its debts. Under limited liability, what is the owner's maximum financial loss from the company debts?
3. A business changes from a partnership to an incorporated company. Which change in legal responsibility follows from this change of structure?
What does unlimited liability make a business owner personally responsible for?
The business’s debts.
What can an owner with unlimited liability lose to repay business debts?
Personal possessions.
What limits an owner's financial loss under limited liability?
The amount invested in the company.
What does limited liability protect from company debts?
The owner's personal possessions.
What legal identity does a sole trader or partnership have apart from its owners?
None; it has no separate legal identity.
Who is responsible for debts and liabilities after a company is incorporated?
The separate company.
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