A Limited Company
• A Business owned by shareholders who each
give the business money in exchange for
Shares
• It is run by directors (who may also be
shareholders)
• Shareholders are granted Limited Liability –
which reduces the risk of owning a part of a
business.
Setting up a Limited Company
1. Register with Companies House and send them
2. Memorandum of Association - describes what
the company has been formed to do
3. Articles of Association - internal rules covering:
1. What directors can do
2. Voting rights of shareholders
4. Issued with a Certificate of Incorporation
1. Date of incorporation
2. Company number
A Company is a “separate” legal person so far as the law
is concerned – i.e. it is separate from its shareholders
Who controls a Company?
• Shareholders own company
• Company employs directors to control management of
business
• The directors may also be shareholders (most are)
• Directors are responsible to shareholders
– Have a duty to act in best interests of shareholders
– Have to account for their decisions and performance
– Have to prepare financial statements and directors report
for shareholders each year
• Why Employ Directors?
– Shareholders who may not want to get involved in day-today decision-making
Importance of Limited Liability
• Limited liability – an important concept - It means
Shareholders can only lose money they have invested
• This encourages people to invest in companies – lower
risk than operating as a sole trader or partnership
• Those who have a claim against company:
– Remember – the company is a “separate legal person” –
you have to sue the company, not the shareholders
– Limited liability means that they can only recover money
from existing assets of business
– They cannot claim personal assets of shareholders to
recover amounts owed by company
2 Types of Company
Private Limited Companies – these have either
Ltd. or Limited after their name.
Public Limited Companies - these have PLC after
their name
Private and Public Limited Companies
• Shares in a plc can be traded on Stock
Exchange and any member of general public
can buy shares and become a shareholder.
• Shares in a private limited company are not
available to general public
• A private limited company is usually smaller
than a PLC

Private and Public Limited Companies are both
companies! The main difference is concerned
with the share capital of the company
Should a Private Company Become a
“PLC”?
• Most don’t!
• Becoming a PLC is mainly about making it easier to
raise money
– Shares in a private company cannot be offered for sale to
general public
– Restricts availability of finance, especially if business wants
to expand
– 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
company is quoted on Stock Exchange
– To do that, company must do a “flotation”
Disadvantages of Being a PLC
• Costly and complicated to set up as a plc
• Certain financial information must be made
available for everyone, competitors and
customers included
• If the PLC offers its shares on the Stock
Exchange…
– Shareholders in public companies expect a steady
stream of income from dividends
– Increased threat of takeover
– Greater public scrutiny and profile (e.g. analyst
reports, press reports)
Flotation
• When shares in a “PLC” are first offered for sale
to general public
• Company is given a “listing” on Stock Exchange
• Opportunity for company to raise substantial
funds
• Also a chance for existing shareholders to “cash
in” by selling some or all of their shares (e.g. a
venture capitalist who may have invested earlier)
• Complex and expensive process

Visit the London Stock Exchange website to find
out more about flotations
Buying Shares in a Company
• Why buy shares?
– Shares normally pay dividends = a share of profits
– Companies on Stock Exchange usually pay dividends twice
each year
– Over time value of share may increase and so can be sold
for a profit (known as a “capital gain”)
– However - price of shares can go down as well as up, so
investing in shares is risky.
– If they have enough shares they can influence
management of company
• A “venture capitalist”
– Will often buy up to 80% of shares of a company and insist
on choosing some of directors
Risks faced by Shareholders
• Remember – shareholder’s liability is limited
• However, there are still risks in investing:
• Company reduces its dividend or pays no
dividend
• Value of share falls below price shareholder
paid
• Company fails and investor loses money
invested