Business Studies- Limited Liability Companies Flashcards
Companies are incorporated. This means that they have a separate legal identity from their owners. They can own assets, form contracts, employe people, sue and be sued. What are the other main features of limited companies?
The owners have limited liability. If a limited company has debts, the owners can only lose the money they originally invested. They cannot be forced to use their own money to pay debts run up by the business.
Capital is raised by selling shares. Each shareholder owns a number of these shares. They are the joint owners of the company. They are entitled to vote on important matters such as who should run the company. They also get dividends paid from the profits. Those with more shares will have more control and get more dividends.
They are run by directors elected by the shareholders. The board of directors, headed by a chairperson, is accountable to shareholders. He/she should run the company as the shareholders wish. If the company performs badly, directors can be voted out at an annual general meeting.
Whereas sole traders and partnerships pay income tax on profits, companies pay corporation tax.
For a limited company it is necessary to follow a legal procedure.
Forming a limited company
Some important documents must be sent to the registrar of companies before a limited company can be formed. The two most important ones are ….
memorandum of association and the articles of association
A limited company must have a minimum of…
two members, but there is no upper limit.
If these documents are acceptable the company will get….
a certificate of incorporation
This allows it to trade as…
a limited company.
Most private limited companies tend to be small or medium size however a small minority are large. Some features of private limited companies are…
Their business name and in limited.
Shares can only be transferred privately (from one individual to another). All shareholders must agree on the transfer and they cannot be advertised for sale. Shares in private limited companies cannot be traded on the stock market.
They are often family businesses owned by family members or close friends.
The directors of these firms tend to be shareholders and are involved in the running of the business.
Advantages of private limited companies
SHareholders have limited liability More capital can be raised Control cannot be lost to outsiders Business continues if a shareholder dies Has more status than a sole trader for example
Disadvantages of Private limited companies
Financial information has to be made public
Costs money and takes time to set up
Profits are shared between more members
Takes time to transfer shares to new owner
Cannot raise huge amounts of money like plcs.
Public Limited companies tend to be larger than private limited companies. Their shares can be bought and sold by the public on the…
stock exchange. Any person or organisation can buy shares in plcs.
Going public can be expensive because:
The company needs lawyers to ensure that the prospectus is legally correct.
The prospectus has to be printed and circulated.
A bank may be paid to process share applications.
The company must insure against the possibility of some shares remaining unsold, therefore, the fee is paid to an underwriter who must buy any unsold shares.
There are advertising and administrative expenses.
The plc must have a minimum of £50,000 share capital.
Advantages of public limited companies
Large amounts of capital can be raised
Shareholders have limited liability.
PLCs can exploit economies of sale.
May be able to dominate the market.
Shares can be bought and sold very easily.
May have a very high profile in the media.
Disadvantages of public limited companies
Setting up costs can be very expensive.
Outsiders can take control by buying shares.
More financial information has to be made public.
Maybe more remote from customers.
More regulatory control due to company acts.
Managers may take control rather than owners.
A joint-venture is:
where two or more companies share the cost, responsibility and profits of the business venture. Most joint ventures involve two firms and the costs and profits are shared equally.
What are the advantages of joint ventures?
They allow companies to enjoy some of the advantages of mergers, such as higher turnover, without having to lose their identity.
Each business can specialise in aspects of the venture to suit its expertise.
Takeovers are expensive. Takeovers often incur heavy legal and administrative costs.
Mergers and takeovers are often unfriendly. Most joint ventures are friendly. The companies commit their funds and share responsibility. This may help to improve the success of the venture.
Competition may be eliminated. If companies cooperate in a joint-venture they are less likely to compete with each other.
There are some disadvantages to joint ventures:
Some joint ventures do not work out. There maybe control struggles. For example, who should have the final say in a 50-50 joint-venture?
Disagreements may occur about the management of the joint-venture. As with any joint-venture there maybe different views on which direction to take.
The profit from the venture is split between the investors. This obviously reduces profit potential.
