sign in sign up
<<
Home , Business, Limited company, Private limited company

WJEC STUDIES A 2008 Spec. Issue 2 2012 Page 1 RESOURCES. and Control of Private Firms.

Introduction Sole traders are the most popular of business Business managers as a steadily legal forms, owned and often run by a single in- grows in size, are in the main able to cope, dividual they are found on every street corner learn and develop new skills. Change is grad- in the country. A quick examination of a busi- ual, there are few major shocks. Unfortu- ness directory such as yellow pages, will show nately business growth is unlikely to be a that there are thousands in every town or . steady process, with regular growth of say There are both advantages and disadvantages 5% a year. Instead business growth often oc- to operating as a sole trader, and these are: curs as rapid bursts, followed by a period of steady growth, then followed again by a rapid Advantages. burst in growth..  Easy to set up – it is just a matter of in- The change in legal form of business often forming the Inland that an individ- mirrors this growth pattern. The move from ual is self employed and registering for sole trader to involves injections class 2 national contributions of further , move into new markets or within three months of starting in business. market niches. The switch from partnership  Low cost – no legal formalities mean there to private limited expands the num- is little administrative costs to setting up ber of manager / owners, moves and rear- as a sole trader. Also no formal audited ac- ranges responsibilities, as well reforming the counts are required, though it makes good decision making process. When a business business sense to keep a full set of busi- floats on the market – becomes a PLC, ness records. the owners are now distant individual -  Decision making is fast - no need for con- holders, or the perhaps not distant enough, sultations. institutional .  Hire and fire as you please – the sole trader employs people that they are happy Business growth does not always follow the to work with. pattern of changing legal form described above, but what we are concerned with are Disadvantages. the problems, inefficiencies and contradic- tory pressures that can occur within a busi-  Limited capital – Sole traders often rely ness, as a firm grows. So in this case the on their own savings and perhaps secured pattern of sole trader – partnership – private business loans. – , is  Limited range of skills – a sole trader may ideal for examining the problems that can oc- be an expert plumber, bur is he expert at cur with transition in size. , managing staff, and controlling cash flow?  Immense pressure – all the decisions and Sole Traders the future success of a business rest with

Title Ownership and control Page 2

one person. Advantages of include:  Unlimited liability – the sole trader is li-  Wider range of skills able for all the debts of the business, up  Greater availability of capital to and including the of all  Privacy of business affairs ( no accounts held, and potential future income. need to be published)  Decision making is shared Sole Trader to Partnership. But becoming a partner does not solve all the Partnerships involve the joint ownership of a disadvantages of being a sold trader. business. Normally there can be between 2 and 20 partners, but in certain businesses The major disadvantages are: such as accountancy firms, there can be many  Capital can still be limited more partners than this. Partnerships are of-  Unlimited liability of partners ( sleeping ten found in the professions, such as be- partners who invest, but take no part in day tween , , doctors etc, but to day running of the business can have lim- can be found in any type of business activity. ited liability) The rules of partnership are laid down in a  Partnerships are dissolved on the death of Partnership Agreement, or the Deed of Part- a partner and this can cause complications nership. in re-establishing the partnership.

The Deed of Partnership, lays out such rules Although, as we have seen, there are many ad- of operations as: vantages when partners become involved in a  The amounts of capital invested business for the first time ( such as increased  The share of profits each partner is to capital, greater input into decision making, receive. wider spread of skills), new partner’s can and  The voting shares of the partners do cause strains within a business.  What is to happen on the death of a partner These strains often result from the loss of Partnerships are  Methods of leaving control of the sole trader over many aspects often found in the the partnership of business activity. For example suppliers or methods may be changed by new professions, such as  Rules for dissolution of the partnership partners, the relationships between managers between lawyers, and employees may now be different. accountants , Should a dispute arise with- doctors etc out a partnership agreement One case study into these pressures examined giving methods of setting the a small boat yard involved in building hand- dispute, then the dispute crafted wooden yachts. The existing owner un- would be settled according to the 1890 Partnership der financial pressure took on a partner, who Act. This is best avoided, particularly were limited li- ability is involved, as the act states that each partner wished to introduce more modern methods of is equally responsible for any debts. I.e. each partner manufacture such as GRP moulding. The move is ‘jointly and severally’ liable. from traditional methods of manufacture, to modern batch production methods, meant that Title Ownership and control Page 3 the previous owner felt dis-empowered, his follows the completion, and submission of two skills that had built the business were in ef- documents. These are: fect redundant, even his relationships with A Memorandum of Association, which pro- existing were not now so impor- vides details of the name, state- tant, as new customers brought in the bulk of ment of of the , the business. These problems were only re- company registered address, and a de- solved by the original owner learning to adapt scription of the business activities of the com- his skills to modern working methods. pany, ( for example the retailing of furniture). And secondly the , The loss of contact indicated which provides details of the roles of the Di- above, can be one of the main problems that rectors, the voting rights arises because of business growth. Customer of shareholders, dividend relationships and personal service may be the policy, formal procedures the situation where keys to success of small businesses. of the Annual General owners may take Meeting, methods of calling little in the As the business grows, then the original an Extraordinary General ongoing owner/manager may find that his or her time Meeting. of a is being taken up with administration, staff management and paperwork. Working rela- Setting up a Limited Com- firm, really starts to tionships that have brought the business suc- pany is not complex, compa- occur in limited cess, may be difficult to maintain. Often nies can be bought “off the companies. partnerships, when founded, are based upon shelf”, for around £60, and the sole trader re-establishing the roles that the relevant details in- made the business successful and passing the serted, or they can be registered and incorpo- less customer orientated tasks onto the new rated on-line, with just a simple fee to be paid, partner, or partners. and only 2 shareholders needed.

The owners of limited companies are of course From Partnership to shareholders. The minimum number of share- holders is only 2, and it is not unusual to find Setting up a Limited Private Limited limited companies with just £100 of issued Company is not Company (Ltd) , two shareholders, with one hold- complex, companies ing 99 shares the other 1 share. In this situa- can be bought “off Private limited compa- tion the owner is very likely to be the manager. the shelf”, for nies, are incorporated This type of limited company is often bought around £60, and the bodies. They are estab- ‘off the shelf’, at a cost of perhaps £60. relevant details lished through the issue of a Certificate of In- inserted …. Limited companies (both Ltd’s and PLC’s), are . This is is- incorporated. This means they have a legal ex- sued by the Registrar of istence separate from that of the owners of Companies, based at . the business. Limited companies can own prop- The issue of a Certificate of erty and other assets, can enter into con- Title Ownership and control Page 4 tracts, and sue and be sued. They survive the There are exceptions to this limited liability death of owners, and can borrow and lend status. If directors are found to . have traded when they new or should have known that the business was not financially vi- When establishing a limited Company, two able, then they can be held liable for debts documents are required, these are that have accrued after the time they should have or did know. Also if directors acted in a  A memorandum of association foolhardy way, creating debts and liabilities,  Articles of association then in these circumstances, they can be held liable as above. What is a memorandum of association? This document sets out: Private Limited Companies also have the advan-  the company's name, tage of potentially accessing greater  where the registered office of the com- amounts of capital through the sale of shares, pany is situated (in , Wales or Scot- but they are not allowed to advertise shares ); and for sale, only being able to what it will do (its objects). The object of a sell through word of company may simply be to carry on business mouth. There is though no ….in larger Ltd’s, it as a general commercial company. limit to the number of is likely that many Other clauses to be included in the memoran- shareholders in a private members of the dum depend on the type of company being in- limited company (Ltd), but Board are not corporated. The form of memorandum for the restrictions on how each type of company is set out in a set of shares can be sold, mean involved in business tables called The Companies (Tables A to F) that shares must be of- management. Regulations, 1985. fered to sale to existing shareholders before they What are articles of association? can be sold outside the current shareholders. This prevents loss of This document sets out the rules for the run- control by existing owners. ning of the company's internal affairs. The Articles deal with internal matters such as There are also disadvantages, to Limited Com- general meetings, appointment of directors, issue and transfer of shares, dividends, ac- Linited Company Shares counts and audit.

Limited Company status has one major advan- tage over sole traders and partnerships, that Managing Director is the owners (shareholders) have limited li- Family Senior Managers ability. This means that they are liable for Workers the debts of the business only up to the amount of capital invested.

Title Ownership and control Page 5 pany status. Firstly Accounts must be pub- lished. For Private Limited Companies this Limited companies are often family businesses, means making full copies available at Compa- which often include other key members of nies House, where they can, for a small fee, staff as shareholders. The main shareholders be viewed by anyone. Also accounts must be may take an active part in the business, or may audited, by an independent , and be on the fringes of day to day business activ- there can be high costs to this. ity. If the shareholders are not engaged in

Limited Company with Veture Capital managing the business, then we see the divorce of ownership and control occurring. Ownership is in the hands of shareholders, but day to day

Managing Director control is in the hands of managers.

Family This separation of ownership and day to day control is one of the reasons why limited liabil- Workers ity in necessary. When large amounts of capi- Venture Capitalists tal were first needed for business ventures (around the time of the ), large scale was limited by the inherent with unlimited liability. The develop- Divorce of Ownership from Control ment of joint stock companies, where investors ’s were contained by the use of limited li- The move to limited company status is likely ability and incorporation, allowed firms to raise to be the first stage of growth when there is the large amounts of capital required. some degree of divorce of ownership from control. Although sleeping partners may exist Because there can be perhaps hundreds of in a partnership (sleeping partners take no shareholders (though more likely to be less), part in day to day business management, but boards of Directors are ap- benefit from limited liability), the situation pointed to oversee the management of the busi- where owners may take little interest in the Operating in a ness. In smaller Ltd’s the ongoing management of a firm, really starts within a new culture to occur in limited companies. are of- ten managers, but in larger brings new demands Shareholding of PLC Ltd’s, it is likely that many in regard to market members of the Board are research, promotion Managing Director not involved in business and Family management. development. Senior Management Workers

Ordinary From private to publicly quoted. Ltd Shareholders to PLC.

Title Ownership and control Page 6

When a firm becomes a PLC, then instead of ment for full disclosure of accounts, which being a ‘family run’ business, we switch to a must be made available to the public at large. situation where the major shareholders are often financial institutions, such as venture In the case of PLCs we see the situation aris- capital companies, pensions funds, or insur- ing where there can be a full ‘divorce or owner- ance companies. ship from control’. This means that those who own the business have little or no say in the How can a private company convert to a day to day running of the business. PLC? To see how this divorce of ownership and con- A private company limited by shares ( a Ltd.) trol arises we can follow, a simple pattern of can re-register as a PLC, growth.

A private company must pass a special resolu- Stage 1. With Private Limited companies, we tion that it be so re-registered and deliver a often see a development of shareholding as il- copy of the resolution together with an appli- lustrated below. cation form to the Registrar of Companies. Stage 2. Control ( day to day management) and The resolution must also: ownership initially rests in the same hands, but  alter the company's memorandum so that as further capital is raised (in this example it states that the company is to be a public from company), we see some limited company; loss of control from the majority sharehold-  make any other alterations to the memo- ers. The Venture Capital company may appoint randum so that it con- senior management, and have one or more forms to that required seats on the Board of Directors.

British firms may be for a public limited com- able to predict pany; Stage 3. The true impact of divorce of owner- patterns of  make any required al- ship from control is only felt when a company resulting from terations to the articles goes public. Now there are likely to be 10’s of changing levels of of association of the thousands of shareholders, but these will not economic activity in be all small investors, there will also be institu- the UK, but this will company be much harder in tional investors as well. These institutional in- unknown or little There are also require- vestors, for example insurance companies, pen- understood foreign ments in regard to pub- sion funds, and managers, may have a markets. lishing of accounts and great influence over how the business is run, providing fully audited but the small , perhaps in the majority accounts before the change occurs. when they are all taken together, may have lit- tle or no influence, on the strategy, or objec- Public Limited Companies are often the larg- tives of the company they own. est type of business. Perhaps with millions of In the case of PLCs it is the role of sharehold- shareholders, they may be worth £50 billion ers to appoint the Board of Directors, who or more. Some, of course, are much smaller, must act in the best interest of the sharehold- but what they all have in common is a require- ers. The Board of Directors is made up of: Title Ownership and control Page 7

Chairman – the titular head of the business,  of increasing dividends means less The Chairman can be no more than a figure- capital remains available for reinvestment, head, or alternatively the real driving force this in turn can lead to increased gearing. behind the company.  Pressure to maximise returns on existing Chief Executive – the senior manager of the products – which may be done through business. The Chief Executive often runs the sweating assets or squeezing . business, deciding on overall objectives and  Loss of ethical objectives as be- strategy. comes the overriding priority. Executive Directors – department or division heads. National to International. Non– Executive Directors. Outside appoint- ments, with no departmental responsibilities. When a business moves into overseas markets These non-executives are appointed as the for the first time, there are number of prob- independent voice of shareholders. lems that can arise which are separate from those indicated by change in size or form of The institutional investors can and often do ownership. have a very different set of priorities to those of the existing management. Institu- The first of these problems is related to mar- tion fund managers (the people who make the keting. Operating in a within a new culture decision to invest), are often driven by the brings new demands in regard to market re- need to see short term performance returns. search, promotion and product development. To This performance may relate directly to the give one simple example, around 10 years ago a level of dividends paid, or short term in- Swedish drinks manufacturer attempted to creases in share prices. move into the UK market, with a fizzy drink, named psschitt (the sound made upon the As the objectives can be very dif- opening of a bottle). Obviously there were ferent from those of existing management, problems! we may therefore see two groups of owners with different views. One (institutional inves- Secondly, networks need to be es- tors) targeting short term aims, the other, tablished or distribution agreements negoti- (existing management), trying to focus on ated or signed. long term goals. Thirdly a business operating in international This conflict can have direct, and material markets for the first time will come up against effects on the business. These effects in- problems resulting from currency conversion. clude: Fluctuations in exchange rates can make trad- ing unprofitable or force rethinks on  Conflict over objectives – diverting man- strategies. Hedging currencies can reduce agement time from day to day business these risks. Also not all countries allow free management flows of capital across borders, profits made  Weakening of strategic objectives – loss in one country may not be easily transferable of long term plan back home. Title Ownership and control Page 8

istics: Economic factors affecting trade abroad can  Firstly they are Enterprises – they are also cause problems. British firms may be like other businesses directly involved in able to predict patterns of trade resulting producing or providing services to a from changing levels of economic activity in market. the UK, but this will be much harder in un-  Social aims – they have explicit social known or little understood foreign markets. aims such as creation, training or the provision of local services. This is not just Also, technological factors also play an impor- talk ,these aims are clearly laid out. tant part in success in overseas markets. Their ethical values may include a commit- Foreign countries may have different safety ment to improving the local community standards, (although most standards in the and the skills of the people who live EU now harmonised), and there will be costs there. involved in meeting these safety standards.  Their profits are principally reinvested Also different regulations may apply. to achieve their social objectives. Or al- of MG cars in California, an important over- ternatively profits can be distributed as seas market, were finished by tougher pollu- profit sharing to a much wider range of tion laws which could not be met. stakeholders than just owners and work- ers, for example profits can be used to Finally, , the numbers of, and benefit of the community, or returned to methods used by competition might be misun- customers, or suppliers. derstood.  Increasingly social enterprises measure their social impact, through preparing British firms, operating abroad have a ten- documents such as a Social Audit.. dency to buy up existing firms, or use estab-  Many social enterprises are also charac- lished methods of distribution. This method terised of expansion can help overcome many of the by their social ownership. They are problems of a move into international mar- autonomous kets, but it is an option open only to larger organisations whose management and firms. owner ship structures are normally based on participa tion by stakeholder groups such Social Enterprises. as employees and social investors or by “A is a business with trustees or worker directors who control the primarily social enterprise on behalf of a wider group of objectives whose surpluses are principally stakeholders. reinvested for that purpose in the business or in the community, rather than being driven Workers Co-Operatives. by the need to maximise profit for shareholders and owners.” - UK Worker are a form of business Definition. (Surpluses are normally profits). ownership where the employees in a for-profit firm directly own and control the business on Social enterprises share common character- the basis of "one person, one vote." Each Title Ownership and control Page 9 member has an equal say. Typically all work- ers, including management, are eligible to be worker-owners after working for a certain period of time perhaps 6 months and paying a membership fee.

In a worker , ownership and con- trol of the business derive from working in the company, rather than from simply invest- ing capital in it. So it is not the providers of capital who are the most important stake- holders, but instead the thinking is that la- bour employs capital, rather than capital em- ploying labour, so the workers are the most important stakeholders. . The normal structure prevents non-workers from holding voting shares, and so keeps control of the firm within the workforce, preventing takeovers and outside influence.

Profits and losses from the business are shared amongst worker-owners according to either the hours worked or gross pay. Skill and seniority determine rates, which are often set by an equitable ratio between the highest and lowest paid worker-owners. This means that instead of huge differences between pay levels between the most senior and junior members of staff , pay differen- tials throughout the levels of seniority and responsibility may be as low as 50%.

Notes.