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It´s just like you buying and storing lots of food at home. You increase your inventory/stock of rice/potatoes/pasta but you would have less cash because you spend it on your stock of food.
Creditors and banks can pursue only the assets which are in the company and the owners’ liability, but not the organisation’s, is limited. In contrast, sole traders and partners have unlimited liability for all the business’s debts.
Can you please explain the above statement? I copied and paste it from page 5 in the BT handbook. I do not understand the wording.
In a sole trader business, although some assets and liabilities will appear on the businesses SOFP for accounting purposes, in law there is no difference between those assets and the sole trader’s personal assets. If the business were to fail then creditors of the business could, through the court, claim the owner’s house, car and personal savings etc to pay the business debts. The owner could loose everything so has unlimited liability.
In a company, the company owns its own assets and owes amounts to its own creditors. These assets and liabilities are completely separate from those of the company’s owner’s (the shareholders). If a company fails then the creditors can pursue all the company’s assets to get their money (the company has unlimited liability) but the creditors cannot seize the shareholders’ assets. Thus the shareholders are relatively safe: they have limited liability.
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