Introduction

Businesses provide the goods and services we need and use. Examples of goods are food, clothing and holidays. Services are provided by hairdressers, plumbers etc. where a person uses a particular skill.

Businesses take a number of different legal forms, one of which can be a sole trader, run by an individual, who takes all the risk of losses in addition to any profits. This is called unlimited liability. Two or more people may work together in a partnership and like sole traders this partnership has unlimited liability. Sole traders and partnerships do not have to make their financial records (accounts) public.

If a business wants to move away from unlimited liability it forms a limited company. This can be private - indicated by Limited (Ltd) in its name or public (with plc in its name). The funding for limited companies comes from shares. These are owned by shareholders. A private limited company does not sell its shares on the open market whilst a plc does. Both types of limited company prepare trading accounts, which are filed with the Registrar of Companies and are open for public inspection. Small and large enterprises provide employment for over 20 million people in the UK.

Businesses typically seek to make a profit for their owners. Profit is a reward for taking risks and for ringing together various resources (including people) to make goods and services that consumers want.

However, taking a risk means risking failure as well as success. A business may fail because it has not correctly assessed the risks it faces. Many businesses succeed but others fail; they become insolvent. This means they do not have enough assets (what they own) that they can turn into cash quickly enough to pay their pressing liabilities (what they owe).

By law, the owners of small enterprises, including all sole traders and most partnerships, have unlimited liability for the debts of the business. This means that if the business is insolvent the owners may have to sell the things they own (including their homes) to meet the liabilities of the business.

In contrast, companies (either with shareholders or owners), have limited liability. The most they stand to lose when their company becomes insolvent is the value of the shares they hold. Directors may have personally guaranteed a company's debts.