Limited Company

A limited company is a separate entity from the individuals who own it. It has a distinct legal personality. A company can take many forms, including a privately-owned company, a public limited company and a company limited by guarantee.

Companies have a formal constitution set out in the Memorandum and Articles of Association. The Memorandum sets out the framework of the business in a set of clauses, name, registered office, objects (objectives) and so on, and defines the company’s relationship with the outside world. The objectives of the business are, therefore, defined formally, though they may be interpreted in different ways by directors and executives. The Articles are the internal constitution, laying down how directors are elected and removed, rights and duties of shareholders and other internal constitutional matters.

Companies are regulated by statute, principally the Companies Act 1985. Constitutional documents have to be registered with the Companies Registry and held on public file. The Act governs a wide range of matters, including submission of statutory returns, meetings and types of resolution which may be considered.

The earnings of limited companies are subject to corporation tax, not personal taxation as with other trading entities.

A company can only be formed within the framework set down by the 1985 Act. One method of adopting this corporate form used by entrepreneurs is to buy a dormant company “off the shelf”. This can be done for a few hundred pounds.

All companies are owned by their shareholders, whose democratic rights within the company are defined by the Articles but also by statute. The latter also contains provisions on “dissentient rights” , essentially, the protection of minority shareholder groups.

The “trustees” for the shareholders are the Board of Directors, responsible for setting the general direction and policy of the company. These can be executive (full-time) or non-executive (part-time). The Chief Executive may or may not be a director but will nearly always have a significant input into policy matters. It is quite usual for there to be several executive directors in key areas such as finance, information technology and marketing.

Depending on the size of the company, there can be varying degrees of complexity of organisation. Small companies are similar in many ways to unlimited businesses, whilst public companies quoted on the Stock Exchange can have many thousands of employees, often operating across international frontiers.

Advantages: The word “limited” in “limited companies” has great significance. It means that the owners (the shareholders) have limited liability, they only stand to lose at most the amount of money they have invested in the company. Any obligations incurred accrue to the company itself, separable from the individual shareholders.

The owners of the business reap rewards in the form of dividends. These are distributed profits, so the more the company makes, the more the shareholders gain. Shareholders can also gain by the value of their shares appreciating. If a company is successful the value of the shares will increase. The converse is also, of course, true. In a “doomsday scenario”, the shares can become worthless.

Companies have at their disposal many sources of capital. They can raise equity from existing shareholders through rights issues and can attract new shareholders by new share issues, subject to the relevant clause in the Memorandum. Loan capital can be raised by long-term borrowings from a wide range of sources, including long-term bank loans and by issuing debentures and bonds, For profitable companies, capital can also be introduced by ploughing profits (retained profits) back into the business.

As a company becomes bigger, it is likely to reap economies of large-scale operation, resulting in the ability to offer more competitive prices. The large company is also able to employ specialists in management service functions.

A company can establish a higher profile and broaden its sources of capital by seeking a quotation on the London Stock Exchange. Those who do not meet the stringent criteria required for the main list can be floated on the Alternative Investment Market (AIM), specially set up for smaller but high potential companies.

Disadvantages: A company is a more complex organisation with correspondingly complex management issues to be addressed. In addition to the business of delivering goods and services, there are procedural, administrative and human issues to be managed.

Setting objectives is also more complicated, Over just a few years, the objectives of the business can change radically, resulting in stresses on the organisation. These can increase costs and cause redundancies, affecting both the competitiveness of the company and its public profile.

Although limited companies can raise capital through a wider range of sources, the stakes are higher. A bad investment decision can, for example, be extremely harmful or even fatal to the company.

The greatest threat to the corporate sector comes from the pressures of accelerating change; can the company adapt to the rapidly changing environment and an increasingly global marketplace?