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BTEC Business. Limited Liability Companies (2). Setting up a Limited Company. Register with Companies House Company is a “separate” legal person so far as the law is concerned – i.e. it is separate from its shareholders Issued with a Certificate of Incorporation Date of incorporation

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btec business

BTEC Business

Limited Liability Companies (2)

setting up a limited company
Setting up a Limited Company
  • Register with Companies House
  • Company is a “separate” legal person so far as the law is concerned – i.e. it is separate from its shareholders
  • Issued with a Certificate of Incorporation
    • Date of incorporation
    • Company number
  • Memorandum of Association - describes what company has been formed to do
  • Articles of Association - internal rules covering:
    • What directors can do
    • Voting rights of shareholders
controls of a company
Controls of 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-to-day decision-making
    • Special skills and experience
importance of limited liability
Importance of Limited Liability
  • Limited liability – an important concept
  • Shareholders can only lose money they have invested
  • 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
private and public limited companies

Private and Public Limited Companies are still both companies! The main difference is concerned with the share capital of the company

Private and Public Limited Companies
  • Shares in a plc can be traded on Stock Exchange and can be bought by members of general public
  • Shares in a private limited company are not available to general public
  • Issued share capital (initial value of shares put on sale) must be greater than £50,000 in a plc
  • A private limited company may have a smaller (or larger) capital.
should a private company become a plc
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”
buying shares in a company
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
  • Good example is 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
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