REVISED GCSE FACT FILES Unit 2: The Business Environment For first teaching from September 2008 For first award in Summer 2009 Limited Companies Limited Companies

them, how to use them.” “Starting my own company was a great decision and the legal requirements are much simpler Learning Outcomes here than in Poland”.

At the end of this unit students should be Take up has been very healthy, with AA Polish Building able to: Supplies ltd having some 800 regular customers most of whom are Polish tradesmen however they are already demonstrate knowledge and understanding of the seeing orders from UK builders and customers who have term limited company; been impressed with the products their Polish counterparts have been using. identify and describe different limited companies’ businesses in their local area; What is a limited company? A limited company is a very demonstrate knowledge and understanding of the different form of business difference between a private limited company and a enterprise from a sole trader or public limited company; and a partnership in that a limited demonstrate an awareness of the advantages and company is a separate legal entity disadvantages of operating as a private limited from its members. This means company. that a company can raise finance in its own right and any debt which is run up belong to the company and not the owners. Setting the Scene Limited companies are owned by shareholders who have AA Polish Building Supplies ltd limited liability under law. What this means is that if a company such as AA Polish Building Supplies ltd runs up Afran Ambroky runs AA Polish huge debts the individual shareholders will not have to sell Building Supplies ltd, and is a their private possessions to cover the debts, they will simply supplier of construction materials lose the money they have invested in the business. that he buys from Poland and sells to the many thousands of his Setting up as a limited company countrymen based in the UK. The To form a limited company in company has eight shareholders the UK a number of important each of whom contributed documents along with the correct £25,000 to the company’s initial registration fee must be sent capital. to the appropriate registering authority. These documents A builder for more than two decades in Poland, Mr Ambroky include: had no intention of setting up a business in the UK, but came to London to keep an eye on his daughters who are The memorandum of association studying in the city. Arriving in 2006, he found that Polish builders were longing for the materials they had used back The memorandum of association includes details such as home, and struggling to find something in the UK that they the official name of the company, the type of company liked as much. (PLC or LTD), the work and objectives of the company, the amount of initial share capital and the names of the original “People get used to one thing and they want that,” he shareholders. explains over a mug of black tea and a biscuit. “It’s like food - they understand how the materials work, how to mix The articles of association Continuity The articles of association are regulations that cover areas Because a private limited company has a legal existence such as the different voting rights associated with different separate from that of its owners it will not be affected if types of share, the rules of board meetings, how profits will one particular shareholder leaves, retires or dies. AA Polish be divided and the duties of directors. Building Supplies Ltd has an everlasting life and can only be ended through an official wind-up or liquidation. There are two main types of limited company in the UK a private limited company (Ltd), a public limited company (Plc) Control Private limited company (Ltd) Because private limited companies such as AA Polish Building Supplies Ltd can not sell their shares publicly they tend to A private limited company is a business which is have fewer shareholders than Public Limited Companies. incorporated and therefore is a separate legal entity from This means that each shareholder has more control over the its owners. The owners of the company are known as business than would be the case in public limited companies. shareholders and each shareholder’s liability is limited to the amount of capital they have invested in the business. Disadvantages of

Private limited companies such as AA Polish Building operating as a Private Supplies Ltd are required by law to carry the suffix “Limited” limited company or more commonly “Ltd” as part of their company name. This is to ensure that all relevant stakeholders are aware of Sharing of profits the company’s limited status. All of the shareholders in AA Polish Building Supplies Ltd are entitled Shares in a private limited company cannot be bought by to a share of the profits, which members of the general public. Those who hold shares in a they take as dividend payments. private limited company can only sell these shares privately The exact amount of the profits and with the consent of the other shareholders. they receive will depend on the proportion of the company’s shares This inability to sell shares publicly is the key difference they own. In AA Polish Building between a private limited company and a public limited Supplies Ltd all eight shareholders company. will be entitled to the same dividend payment since they all Advantages of own an equal share of the business. operating as a Private Lack of privacy limited company Private limited companies such as AA Polish Building Supplies Ltd are required under UK law to make certain Raising capital aspects of their affairs available to the public for general Because there is no limit to the number of members a private inspection. This may give competitors valuable insights into limited company can have it will be able to raise more capital the running of the company. than a partnership or a sole trader. In addition private limited companies such as AA Polish Building Supplies Ltd Set up costs are generally larger than sole traders or partnerships and Setting up a private limited company can be a time are therefore normally regarded as being less risky. For this consuming and costly process as there are official procedures reason they typically find it easier to get loans from banks. to complete to ensure that the business complies fully with UK company law. As we learned earlier all limited companies Limited liability must draw up memorandum and articles of association. A private limited company is an incorporated business and Completing these documents properly can take time and therefore is a separate legal entity from its owners. This often requires the assistance of a solicitor. means that if AA Polish Building Supplies Ltd runs up huge debts the individual shareholders such as Afran Ambroky Limit on capital will not have to sell their private possessions to cover the AA Polish Building Supplies Ltd is not able to issue or sell debts. In a private limited company the shareholders will their shares publicly as is the case with public limited only lose the money they have invested in the business. companies. This means that it is more difficult for them to raise the capital required to finance expansion and growth. Activity Revision questions

Limited companies on the 1. What do the letters Ltd indicate in AA Polish Building increase Supplies Ltd? 2. What documents does a business have to complete Recent reports suggest that a large number of small before it can be can be registered as a company? business owners are converting their businesses to limited 3. Using the yellow pages, name 5 private limited companies. The bulk of this increase is thought to have companies who operate in your local area. come from existing sole trader or partnership businesses 4. If AA Polish Building Supplies Ltd was to go bust leaving such as taxi drivers and milkmen who have decided to debts of £500,000 how much would Afran Ambroky have incorporate their businesses to take advantage of new tax to pay as a result? laws for limited companies. 5. What advantages does a Private limited company have However analysts are worried that many of those who have over a sole trader or partnership? set up companies don’t understand the legal obligations of 6. Explain why the business affairs of a private limited a limited company and the potential fines and prosecution company are not as private as those of a sole trader. they face for not complying with them. Failure to file accounts on time, for example, can lead to fines of up to £5,000 and in some cases to the winding up of the company. (Source adapted from www.scotsman.com 11th may 2003)

1. Explain what is meant by a private limited company. 2. Analyse some of the advantages that a small businesses such as a self-employed taxi driver or milkman might gain from converting his businesses into private limited company. 3. Explain some of the difficulties they might face after they incorporate their businesses.

Key Terms

• Limited liability means that individual shareholders are not personally liable for the debts of the company they are only liable for the amount of money they have invested in the company. • A private limited company is a business which is incorporated and is therefore a separate legal entity from its owners. Shares in a private limited company cannot be bought by members of the general public. • The memorandum of association is the document which set out details of a company’s purpose and its shareholders. • The articles of association are regulations which relate to the internal relationships between the shareholders and the directors of a company.