The features and formation of limited companies

Limited companies are incorporated businesses with a separate legal identity from their owners. This separation allows the company to function independently in various legal and operational aspects.

Key features of limited companies

• Separate legal identity - The company exists as its own entity, distinct from its owners. It can own assets, enter into contracts, hire staff, take legal action against others (sue), and face legal claims itself (be sued).
• Limited liability - Shareholders' financial responsibility for company debts is restricted to the value of their initial investment in shares. They cannot lose personal assets beyond this amount.
• Raising capital - Funds are generated by issuing shares to investors, who become shareholders.
• Governance structure - Shareholders vote to appoint directors who manage daily operations, led by a chairperson. The chairperson reports to shareholders and can be held accountable for performance.
• Accountability mechanisms - Poorly performing directors may be removed by shareholder vote at an annual general meeting (AGM).
• Taxation - Profits are subject to corporation tax, unlike sole traders or partnerships, which pay income tax on earnings.
• Membership requirements - A limited company needs at least two members, with no maximum limit.

Formation process for limited companies

To establish a limited company, founders must submit key legal documents to the Registrar of Companies. If approved, a certificate of incorporation is granted, officially recognising the company.

Essential documents for formation:

• Memorandum of association - Outlines the company's basic structure and details, including:
  • The company's name
  • Location of the registered office
  • Objectives and planned activities
  • Amount of capital to be raised and number of shares to be issued
• Articles of association - Covers internal rules and procedures, such as:
  • Rights of shareholders depending on share classes
  • How directors are appointed
  • Length of directors' terms
  • Frequency of meetings
  • Arrangements for auditing accounts

Private limited companies

Private limited companies are a common choice for small to medium-sized businesses, offering limited liability while keeping ownership restricted.

Characteristics of private limited companies

• Naming convention - The company name includes "Limited" or "Ltd" to indicate its status.
• Share transfer restrictions - Shares can only be sold or transferred privately, requiring agreement from all existing shareholders.
• Trading limitations - Shares cannot be advertised publicly or traded on stock exchanges.
• Typical structure - Often run as family businesses, with directors who are also shareholders actively involved in management.
• Suitability - Frequently used by small and medium enterprises that prefer to maintain control without public share trading.

Many family-owned or smaller businesses operate as private limited companies to benefit from limited liability while avoiding the complexities of public trading.

Public limited companies

Public limited companies allow wider access to capital through public share trading, but they come with stricter requirements and higher costs.

Characteristics of public limited companies

• Naming and status - Identified by "PLC" in the name, indicating shares can be freely bought and sold by the public.
• Capital requirements - Must have a minimum share capital of £50,000 to operate.
• Share trading - Shares are openly traded on stock markets, enabling broad investment.
• Scale - Typically larger organisations, sometimes operating on a multinational level, though some large businesses remain private.

Public limited companies are often bigger than private ones and may evolve from private companies through a process called flotation, or "going public."

Process of flotation

Flotation involves issuing a prospectus, a document that invites public investment by detailing the company's shares and operations. This step is regulated to ensure transparency and proper conduct.

Costs associated with going public

Becoming a public limited company incurs several expenses, which can be significant.

These costs reflect the regulatory control needed to protect investors and maintain market integrity.

Multinational companies

Multinational companies are large-scale businesses that extend operations beyond their home country, often as public limited companies.

Defining features of multinational companies

• Global operations - Significant production or service activities in at least two countries.
• Size and resources - Characterised by large assets and turnover, enabling access to top global executives.
• Marketing and technology - Strong capabilities in advertising, marketing, and implementing advanced technology.
• Influence and efficiency - Wield economic and political power, benefiting from economies of scale for operational efficiency.
• Control structure - Central management typically based in the home country, with profits returned there.

While many multinationals are public limited companies, some large private companies also operate internationally.