Business Law and Company Liability

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Liability of the members in relation to the obligations of the business organisation

Sole proprietorship
The sole proprietor and the owner is regarded as the same entity. Therefore, the owner has unlimited liability in relation to the obligations of the business organisation. This would be a disadvantage as the owner’s personal assets are at risk as the owner is personally responsible for all debts and obligations of the business as regarded by law.

Partnership
Same as above.

Limited liability partnership (LLP)
The LLP is a separate legal entity whereby LLP’s liabilities are its own. Therefore the partners will not be personally liable for the LLP’s debts and obligations.

Limited Partnership
LP is not a separate legal entity. However, only the general partner who takes part in the management of the firm is personally liable for debts and obligations of the LP.
The limited partner liability is capped at the amount of the agreed investment in LP and his other assets would not be at risks. It should be noted that the limited partner should not take part in the management of the firm otherwise he would be considered a general partner and his liability will be unlimited.

Company
The company is considered as a separate legal entity and the company’s assets are its own. The company’s liabilities are also its own and the shareholders and directors of the company are not personally liable. This is also exemplified in the case of Saloman v A Salomon & Co Ltd (1987) where the court held that the shareholders are not liable for the firm’s liabilities.
Exceptions to this are when the directors are fraudulent or incur debts without the reasonable prospect of payment. These would render the directors invovled personally liable for fraud or debts. (see summary notes)

In a limited company, in the event of winding up, the liability of the members are…...

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