Limited companies - an introduction
A quick and easy way for a firm to expand is to attract outside investors who would
introduce extra capital into the firm. However, new and small firms are unlikely to
attract many investors because of the risk that all sole traders face of unlimited liability.
If a sole trader cannot settle the debts of a firm with business resources then the sole
trader will have to use her own personal possessions to clear any business debts.
The problem of unlimited liability was realised in the nineteenth century as Britain
underwent rapid industrialisation. As a result, the 1855 Companies Act created a new
form of business organisation - the Limited Company.
Limited Companies differ from other forms of business organisations because they are
seen as separate legal entities from the owners of these companies. The company exists
in its own right and can be treated as separate from the owners of these companies.
This means that if the business fails for some reason, the owners of this company
cannot be made personally responsible for the debts of the company - in other words,
their labiality (what they owe) is limited to what they invested in the company (and no
more than that - the total amount that can be lost by an investor is limited to the
amount hat they invested).
A company is owned by the shareholders of that company. Each shareholder 'owns' a
share in the company. This share is really a proportion of the capital. Each company
raises its initial capital by the issue of shares. Investors will give the company money in
the hope of either dividend payments (which are paid out of the profits to all
shareholders) and capital gains (the value of their share will increase if the firm is
successful).
In most cases, limited companies cannot be run by shareholders, as there are too many
in number. Therefore, each limited company will elect a board of directors. Each
director is elected by the shareholders (votes are allocated in proportion to the amount
of shares owned - the more shares, the more votes one has). The elected directors will
run the company in the interest of the shareholders (in nearly all cases the objective of
the directors will be to maximise profits so that shareholder returns are highest). Each
board of directors will also appoint a chairperson who represents the company's most
senior director. The chairperson will provide the overall guidance and strategy for
running the company. Directors will have to be re-elected by the shareholders at each
, annual general meeting (AGM). In most cases, the directors have been elected due to
the fact that they own a large number of shares - thus making it hard for them to 'lose'
an election.
Setting up as a limited company
The creation of a limited company requires legal formalities to be followed. Two key
documents that have to be drawn up are as follows:
1. Memorandum of association
2. Articles of association
These documents will contain the following details:
Memorandum of association
1. Name and address of company
2. Objectives of company and its purpose (i.e. its main activities)
3. Amount of capital to be raised and number of shares
Articles of association
1. Procedure for appointing directors
2. Length of time of office for each director (before re-election is required)
3. Frequency of company meetings (AGMs)
4. Details of auditing arrangements for the final accounts
Once this procedure has been completed and the company is registered with
Companies House then the company is, in effect, born. The company will be granted a
certificate of incorporation. This means that the company now exists as a separate legal
entity from its owners. The company must ensure that shareholders are informed of
forthcoming AGMs and also the company must send a copy of the final accounts to the
Registrar of Companies (a government official who will ensure that the public has access
to company accounts).
Types of limited company
All limited companies must have a reference to the fact that they are a limited company
after their name. In the UK there are two types of limited company. These are as
follows:
A quick and easy way for a firm to expand is to attract outside investors who would
introduce extra capital into the firm. However, new and small firms are unlikely to
attract many investors because of the risk that all sole traders face of unlimited liability.
If a sole trader cannot settle the debts of a firm with business resources then the sole
trader will have to use her own personal possessions to clear any business debts.
The problem of unlimited liability was realised in the nineteenth century as Britain
underwent rapid industrialisation. As a result, the 1855 Companies Act created a new
form of business organisation - the Limited Company.
Limited Companies differ from other forms of business organisations because they are
seen as separate legal entities from the owners of these companies. The company exists
in its own right and can be treated as separate from the owners of these companies.
This means that if the business fails for some reason, the owners of this company
cannot be made personally responsible for the debts of the company - in other words,
their labiality (what they owe) is limited to what they invested in the company (and no
more than that - the total amount that can be lost by an investor is limited to the
amount hat they invested).
A company is owned by the shareholders of that company. Each shareholder 'owns' a
share in the company. This share is really a proportion of the capital. Each company
raises its initial capital by the issue of shares. Investors will give the company money in
the hope of either dividend payments (which are paid out of the profits to all
shareholders) and capital gains (the value of their share will increase if the firm is
successful).
In most cases, limited companies cannot be run by shareholders, as there are too many
in number. Therefore, each limited company will elect a board of directors. Each
director is elected by the shareholders (votes are allocated in proportion to the amount
of shares owned - the more shares, the more votes one has). The elected directors will
run the company in the interest of the shareholders (in nearly all cases the objective of
the directors will be to maximise profits so that shareholder returns are highest). Each
board of directors will also appoint a chairperson who represents the company's most
senior director. The chairperson will provide the overall guidance and strategy for
running the company. Directors will have to be re-elected by the shareholders at each
, annual general meeting (AGM). In most cases, the directors have been elected due to
the fact that they own a large number of shares - thus making it hard for them to 'lose'
an election.
Setting up as a limited company
The creation of a limited company requires legal formalities to be followed. Two key
documents that have to be drawn up are as follows:
1. Memorandum of association
2. Articles of association
These documents will contain the following details:
Memorandum of association
1. Name and address of company
2. Objectives of company and its purpose (i.e. its main activities)
3. Amount of capital to be raised and number of shares
Articles of association
1. Procedure for appointing directors
2. Length of time of office for each director (before re-election is required)
3. Frequency of company meetings (AGMs)
4. Details of auditing arrangements for the final accounts
Once this procedure has been completed and the company is registered with
Companies House then the company is, in effect, born. The company will be granted a
certificate of incorporation. This means that the company now exists as a separate legal
entity from its owners. The company must ensure that shareholders are informed of
forthcoming AGMs and also the company must send a copy of the final accounts to the
Registrar of Companies (a government official who will ensure that the public has access
to company accounts).
Types of limited company
All limited companies must have a reference to the fact that they are a limited company
after their name. In the UK there are two types of limited company. These are as
follows:
