Question

b) Assume that a business becomes insolvent. Can the owner (or owners) of the business held personally liable for the debts of the business? Give separate answer assuming that the business is organized as: 1. A Partnership 2. A corporation

Answer 1

We will discuss each case below.

First Case - A Partnership

A partnership is an association of two or more persons, known as general partners, who act as co-owners of a business and operate it for profit. Now here in case of a partnership the liability of partners are unlimited.

In case of dissolution of a firm, the partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm. In unlimited partnership, every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner. Therefore, Yes we can say that the owners of the business can be held personally liable for the debts of the business.

However as an exception, few years back a new type of partnership was introduced that is LLP( Limited Liability Partnership). In case of business organisation as a LLP, the liability of Partner is limited to the capital held by that partner.

Second Case - A Corporation -

In case of corporation the capital is (public company) held in form of joint stock. And shareholders holds the capital in form of shares issued. Therefore, shareholders are liable for the company's debts only to the value of the money they have invested in the company. So we can say that liability of owners of buiness in case of a corporation is limited to the value of their shareholding.

Hope it is clear.

Thank You