Limited Companies

Limited Companies - Ltd

Many private limited companies start out as sole traders or partnerships. They are mostly small scale operations and often run by family members. They form a limited company to:

1. Improve their financial security as the owners (now called shareholders) are no longer personally liable for the business debts. This is called limited liability. This means that if the company went out of business and left debts then the shareholders would only lose the money they put into the company. The company would go into liquidation.

2. Provide a better image to the customers who presume the business is more secure.

Benefits for the owners

• The business can still stay small – many ltd businesses only have three or four shareholders. The minimum is one director and one shareholder and there is no upper limit on the number of shareholders.

• The owners usually work in the business are interested in its success.

• The shareholders are often directors and are responsible for running the business.

• It is quite easy to set up a private limited company. In some cases the owners may only have invested £100 or £200 to start up.

• Shares can only be transferred of all shareholders agree, they cannot be sold to the public. This means the owners have direct control over the business.

• As the owners have limited liability they will never lose more that they have invested.

• Banks are more willing to lend money to a limited company.

• The accounts are still private between the owners, their accountants and the Inland Revenue.

Drawbacks for the Owners

• Shares cannot be sold to the general public to raise additional capital.

• Limited companies have to comply with more regulations that sole traders or partnerships. A limited company is not allowed to trade under the name of an existing company if this will cause confusion for customers and suppliers.

• If the company ceases trading it must officially be ‘wound up’.

There are two legal documents that have to be completed in order to form a limited company:

The Memorandum of Association – this gives details about:

• The name of the company

• The address of the registered office

• A statement that the shareholders will have limited liability

• The type and amount of share capital

• A description of the business activities

The Articles of Association – this gives details about:

• Details about the voting rights of the shareholders

• How profits will be distributed

• The directors of the company

• What procedures

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