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ACCA Applied Knowledge · Financial Accounting · The context and purpose of financial statements for external reporting

Which of the following is a defining feature of a limited liability company, as distinct from a sole trader?

A limited liability company is a separate legal entity from its owners. It can own assets, incur debts and sue in its own name, and shareholders' liability is limited to their investment. A sole trader has no such separation and bears unlimited personal liability for business debts.

  1. AThe owner is personally liable for all business debts without limit
  2. BThe company is a separate legal entity from its ownersCorrect
  3. CThe business ceases to exist when the owner dies
  4. DThe business is not required to keep accounting records

Explanation

A limited company has its own legal personality, separate from its shareholders. A sole trader is not legally separate from the owner, so personal liability is unlimited, which is why the first option is wrong. Companies must also keep accounting records, and a company continues despite the death of a shareholder.

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