Limited Company in United Kingdom
Private and public limited companies
Sole traders and partnerships are owned directly by individuals. The sole trader not only owns the business, she/he is the business; similarly with a partnership. It is possible, however, to create a business that is separate – in law – from its owners. Such businesses are called ‘companies’. Companies are businesses that can be passed from one owner to another, which can be bought and sold and which have a separate legal existence to their owners.
Liability
Sole traders and partnerships have unlimited liability. This means that if the business runs up large debts and is unable to pay them, the owners will have to pay the money back out of their own pocket, e.g., sole traders and partners have to use their own money and may even have to sell possessions such as their cars and homes to pay off the debts of their business. The owners liability (responsibility) for debts is unlimited.
Limited companies have limited liability. This means the owners of the company (known as shareholders) can only lose the amount that they have risked should it go bankrupt, e.g., if a Limited Company goes bankrupt, the shareholders will only lose the money that they used to buy the shares.
Limited companies
There are two main types of limited companies:
- Private Limited Companies (Ltd);
- Public Limited Companies (plc)
Shareholders own limited companies. The shareholders receive a share of the profits; this share is known as a dividend.
Setting up a limited company
In order to form a company a Certificate of Incorporation must be received from the Registrar of Companies. Before the Certificate of Incorporation can be issued the Memorandum of Association and Articles of Association have to be completed by the business.
All companies must produce a set of accounts each year that are given to each shareholder. A copy of these accounts must be kept at Companies House and contain the following information:
- Profit and loss account;
- Balance sheet;
- Cash flow statement;
- Directors’ report;
- Auditor’s report.
This means that limited companies have less privacy than sole traders and partnerships because anybody can pay to view the accounts. The accounts of a public limited company (plc) must be very detailed and be available to anyone on request. The accounts produced by a private limited company (ltd) do not have to be so detailed and they are less widely available.
Features of a private limited company(ltd)
The company must display Ltd after its name. This warns people who lend it money that it s owners have limited liability and may not be able to pay back the debt.
The company is not allowed to advertise the sale of its shares and they cannot be sold on the Stock Exchange. This means the shares are usually sold to family, friends and business contacts.
There is no minimum value of shares that have to be sold when starting the company.
They are usually smaller than plcs, but there are examples of very large ltds, e.g., Littlewoods.
How a private limited company becomes a public limited company (flotation)
If a private limited company wants to earn more profits it may decide that it has to get bigger and sell more products in more areas than it does at the moment. Flotation could be used to raise the money needed to expand as a plc can sell shares to anybody rather than just friends and family.
The company will produce a prospectus that attempts to persuade investors to buy shares in the company. The prospectus will contain information about past accounts, the company’s business activities and aims and objectives for the future. In order to float on the stock exchange the company must issue at least £50,000 worth of shares. Most companies who become plcs sell shares with a value far greater than the minimum £50,000. This is because the process of becoming a plc is a very expensive and complex process and smaller businesses could not afford the costs involved.
Features of a public limited company(plc)
They must have plc after the company name. Again this warns people that the owners of the company have limited liability.
Their shares can be bought and sold on the stock exchange.
There can be a divorce of ownership and control. This occurs because the owners (shareholders) are not involved in the day to day running of the company, this is left to the managers. The objectives of the owners may differ from managers; owners will want the business to earn as much profit as possible whereas the managers may simply want an easy life.
The shareholders are allowed to sell their shares to anybody they want. The shareholders could decide to sell their shares to another company, which could lead to a takeover.
Conflict of interest
Managers may choose to give themselves large pay rises, go on expensive foreign business trips or take long lunches at exclusive restaurants; this can lower the profit levels. This will put managers in conflict with the owners who will want to maximise the levels of profit. The conflict of interest between owners and managers is often called the divorce of ownership and control.
Brief Introduction to Limited Company in Partnership Law
It is a corporate body formed under the Companies Act. It has shareholders who own the company and directors who run the company. These may or may not be the same people. A Limited Company has limited liability which means that the directors and shareholders are not responsible for the debts of the company so long as they have not behaved badly.