Business Structures - Limited Companies

Question 1

What is a limited company?

Answer 1

• are separate legal entities to the founders
• a legal entity can own things itself (assets), can sue and be sued
• owned by shareholders
• shareholders own a share of the company but don’t own assets and aren’t liable for debts
• this is limited liability
• if it can’t pay debts it closes down

Question 2

What are the two types of limited companies?

Answer 2

Private limited companies

• have ltd in their name
• shares can only be sold to friends/family

Public limited companies

• have plc in their name
• shares in the business can be sold to anybody

Question 3

Why become an ltd?

Answer 3

• limited liability, protects personal wealth of shareholders
• easier to raise finance through sales and lending
• stable form of structures - business confines to exist even when shareholders change
• can pay less tax (corporation tax rather than income)
• more privacy than a plc (less shared financial info)

Question 4

Disadvantages of becoming an ltd?

Answer 4

• greater admin costs and legal documents than sole trader
• public disclosure of company info
• all shareholders paid a dividend
• can only sell shares to certain people

Question 5

What are public limited companies?

Answer 5

• have a lot of capital invested in them and are usually large, still limited liability
• share capital of over £50,000 must be raised when selling shares
• at least two shareholders, two directors, a qualified company secretary
• anybody can buy shares and they are traded on stock exchange
• could lose control of company if 50.01% of shares are owned by others
• financial info is available to all

Question 6

How do business change form of ownership?

Answer 6

• the ownership can be changed by switching from a plc to a ltd or vice verse

Question 7

Why switch from a ltd to plc?

Answer 7

• larger pool of potential investors and capital

- higher profile

Question 8

Why not change? (From ltd)

Answer 8

• answerable to shareholders and their interests

- plc shareholders tend to be in for short term profits rather than long term growth

Question 9

Why switch from plc to ltd?

Answer 9

• more privacy
• don’t have to worry about share prices
• less interest in ltd’s, business can focus on long term

Question 10

Why not change? (From a plc)

Answer 10

• long and expensive process of buying out all existing shareholders