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Limited Companies A limited company is a business that is:- owned by shareholders, run by directors and has liability limited. Shareholders People who own a part or share of the business are known as shareholders. Each shareholder hopes the business will grow and make profit so that:- The value of the shares they hold goes up and They receive a share of the profit the company makes through a dividend (a share of profit per share held) Each shareholder is entitled to attend the Annual General Meeting (AGM). Each shareholder has one vote for each share they own and cast it on issues arising at the AGM. Limited Liability Limited liability means that the investors can only lose the money they have invested and no more. This encourages people to finance the company, and/or set up such a business, knowing that they can only lose what they put in, if the company fails. For people or businesses who have a claim against the company, “limited liability” means that they can only recover money from the existing assets of the business. They cannot claim the personal assets of the shareholders to recover amounts owed by the company. Setting up a limited company To set up as a limited company, a company has to register with Companies House and is issued with a Certificate of Incorporation. It also needs to have:- a Memorandum of Association which sets out what the company has been formed to do, Articles of Association which are internal rules over including what the directors can do and voting rights of the shareholders. Private limited companies and public limited companies You can tell whether a limited company is private or public by its name. A private limited company must have the words ‘limited’ in its name or use the letters ‘ltd’ in its name A public limited company must have the letters ‘plc’ in its name The difference between a private and a public limited company are: Shares in a public limited company (plc) can be traded on the Stock Exchange and can be bought by members of the general public. Shares in a private limited company are not available to the general public The issued share capital of a plc (the initial value of the shares put on sale) must be greater than £50,000 in a plc. A private limited company may have a smaller share capital Moving from a ltd to a plc The advantages: Shares in a private limited company cannot be offered for sale to the general public, whereas shares in a public limited company can. It is easier to raise money by selling shares. This is particularly important if thinking about expanding. It is also easier to raise money through other sources of finance e.g. from banks [Note: becoming a “plc” does not necessarily mean that the company is quoted on the Stock Exchange. To do that, the company must do a “flotation” (see below)] The disadvantages of a being a public limited company (plc) are: Costly and complicated to set up as a plc – need to employ specialist bankers and lawyers to help organise the converting to the plc. Certain financial information must be made available for everyone, competitors and customers included. Shareholders in public companies expect income from dividends, which might mean that the business has to concentrate on short term objectives of creating a profit, whereas it might be better to work on longer term objectives, such as growth and investment. Threat of takeover, because another company can buy up a large number of shares because they are traded publicly (can be sold to anyone). If they buy enough, they can then persuade other shareholders to join with them to vote in a new management team. Flotation A company may float on the stock market. This means selling all or part of the business to outside investors, who can then buy and sell the shares on the Stock Exchange. Flotation generates additional funds for the business and can be a major form of fund raising. When shares in a “plc” are first offered for sale to the general public, the company is given a “listing” on the Stock Exchange. Divorce of ownership and control As a business becomes larger, the ownership and control of the business may become separated or divorced This is because the shareholders may have the money, but not the time or the management skills to run the company. Therefore, the day-to-day running of the business is entrusted to the directors, who are employed for their skills, by the shareholders. |