Limited Companies
Private Limited Companies - Ltd
Many private limited companies start out as sole traders or partnerships. They
are mostly small scale operations and often run by family members. They
form a limited company to:
1. Improve their financial security as the owners (now called shareholders)
are no longer personally liable for the business debts. This is called limited
liability. This means that if the company went out of business and left
debts then the shareholders would only lose the money they put into the
company. The company would go into liquidation.
2. Provide a better image to the customers who presume the business is
more secure.
Benefits for the owners
 The business can still stay small – many ltd businesses only have three
or four shareholders. The minimum is one director and one shareholder
and there is no upper limit on the number of shareholders.
 The owners usually work in the business are interested in its success.
 The shareholders are often directors and are responsible for running
the business.
 It is quite easy to set up a private limited company. In some cases the
owners may only have invested £100 or £200 to start up.
 Shares can only be transferred of all shareholders agree, they cannot
be sold to the public. This means the owners have direct control over
the business.
 As the owners have limited liability they will never lose more that they
have invested.
 Banks are more willing to lend money to a limited company.
 The accounts are still private between the owners, their accountants
and the Inland Revenue.
Drawbacks for the Owners
 Shares cannot be sold to the general public to raise additional capital.
 Limited companies have to comply with more regulations that sole
traders or partnerships. A limited company is not allowed to trade
under the name of an existing company if this will cause confusion for
customers and suppliers.
 If the company ceases trading it must officially be ‘wound up’.
There are two legal documents that have to be completed in order to form a
limited company:
The Memorandum of Association – this gives details about:
• The name of the company
• The address of the registered office
• A statement that the shareholders will have limited liability
• The type and amount of share capital
• A description of the business activities
The Articles of Association – this gives details about:
• Details about the voting rights of the shareholders
• How profits will be distributed
•
•
The directors of the company
What procedures will be followed at the annual general meeting
Once these documents are completed they are sent to the Registrar of
Companies who issues a Certificate of Incorporation. A company must
have this before it starts trading. Every year the company must send a copy of
its audited accounts to Companies House.
All profit in theory belongs to the shareholders, however, a proportion of the
profit is usually put back into the business each year to replace old equipment
or fund growth. The remaining profit is then distributed between the
shareholders according to the number of shares held.
Public Limited Company – PLC
These are the largest type of privately owned businesses in the UK. Many
started as small businesses, growing into Ltd’s before being floated on the
stock exchange. This means that any member of the public can buy shares in
the business. the shareholders in these companies are different from the
directors who are usually employed by the business.
A company must have more that £50,000 before it can go public and must
have a good financial track record.
Benefits for the Owners
 Much more capital (money) is available as there are more people to
buy the shares – this makes expansion easier.
 Some public companies can be quite small – there needs to be a
minimum of two directors and two shareholders.
 Large public companies can often operate more cheaply than small
companies as they can operate economies of scale. This means they
could mass produce goods or buy in bulk to save money.
 If the company is successful then the shares will increase in value
which will increase the overall value of the company.
Drawbacks for the Owners
 A public company must be registered with the Registrar of Companies
nad has external regulations to comply with.
 An annual general meeting (AGM) must be held each year nad all
shareholders must be invited.
 Specific accounts must be prepared each year and audited, the public
can have access to these accounts.
 Shareholders invest their money into and in return for this investment
they are entitled to part of the profits – this is called a dividend.
 Shareholders may have little interest in the long term success of the
business and may only be interested in a quick return on their
investment.
 The original owners may lose control over the company.
Multinational Companies
As businesses grow they may find that their national markets are too small for
them. They may begin to export their products. Later they find it an advantage
to switch their production to foreign countries. At this point they can be called
multinational company.
A multinational company means that it operates in at least two countries,
usually both selling products and producing them in these countries. A UK
multinational will almost certainly be a PLC. All major industrialised counties
have their own multinational companies owned by shareholders in their own
country but operating internationally.
Companies often become multinationals as size can help them compete
against other businesses. Size can lead to lower costs of production and
economies of scale. The company may also be able to locate production more
cost effectively.
A multinational needs to be able to cope with a number of different problems:
 Size – often the sheer size and geographical spread of the company
will make good communication essential
 Law & politics – the company must understand all the legal systems in
the locations it operated. They usually are dealing with local and
national government. They also have to be aware of the environmental
regulations.
 Exchange rate fluctuations – multinationals may sell products and earn
profits in a large number of different countries. However, the values of
currencies are constantly changing against each other – this may
make the difference between profit and loss.
Globalisation can be seen it as a primarily economic phenomenon, involving the
increasing interaction, or integration, of national economic systems through the
growth in international trade, investment and capital flows.
However, it can also include the rapid increase in cross-border social, cultural and
technological exchange.
Advantages and Disadvantages of a Private Limited Company
(Ltd)
Advantages
 Limited Liability
 More capital can be raised
as no limit on number of
shareholders
 Control of company can
not be lost to outsiders –
Disadvantages
 Profits have to be shared
out amongst a potentially
larger number of people
 Detailed Legal procedures
must be followed to set up
the business – consuming

shares only sold if all
shareholders agree
The business will continue
even if one of the owners
dies, Shares being
transferred to another
owner

time and money
Financial information can
be inspected by any
member of the public once
filed with the Registrar,
including competitors
Advantages and Disadvantages of a Public Limited Company
(Plc)
Advantages
 Essentially those of the
Ltd, plus
 Increased potential for
raising finance by share
issues or through other
financial investors
 Due to their size they can
gain from Economies of
Scale. Many Plcs are
Multinationals, with
production facilities in
more than one country
 The Plc Can use its power
/ size to dominate a
market, by for example
purchasing competitors
Disadvantages
 Most expensive set up
cost of all forms of
business organisation
considered
 Due to public transfer of
shares, more open to
hostile takeover bids
 Tighter levels of regulation
 Public ownership by
minority shareholders
does not provide them as
owners with any real
control of the business
 Large Plcs may suffer
from diseconomies of
Scale