Limited Liability
Business: Edexcel IGCSE, topic 1.2.3
Types of Ownership - Private Limited Companies
Private limited companies (Ltds) are companies where ownership of shares is restricted. For the company to sell shares, all the current shareholders must agree to sell them. These companies have Ltd. after their name.
Advantages
- The key advantage over sole traders and partnerships is that shareholders have limited liability.
- The fact that ownership is restricted means that all shareholders must agree to sell shares. This means that the owners retain (keep) a lot of control over how the business is managed.
- It is normally easier for a limited company to get a loan than it is for partnerships, as a company is normally seen as less risky. This should increase a company’s access to finance.
Disadvantages
- Finance is needed to incorporate a business. There is an upfront fee as well as costs associated with paperwork. This means that it may not be possible for smaller firms (or brand new firms).
- Unlike sole traders and partnerships, the company is legally obliged to publish their accounts each year and competitors may use these to become more competitive.
Types of Ownership - Public Limited Companies
Public limited companies sell shares on the stock exchange. This means that anybody over 18 can buy shares (often through brokers). Firms often become public companies when they want to expand because selling shares on the stock exchange allows them to raise finance for investment. In 2017, Snapchat went through this process (which is called a flotation).
Advantages
- Selling shares on a stock exchange allows companies to raise money for investment, which enables the company to grow faster or bigger.
- It is much easier for companies to raise capital (money) from banks if they are public limited companies because they present less of a risk (given the number and size of investors).
- Shareholders have limited liability because the company is incorporated.
Disadvantages
- Owners often have very little say over how the business is run. This means that it can be hard to agree on how the business is run.
- Anyone can take over the company if they are able to buy enough shares. When shareholders own more than half the shares, then they will have control over the company.
- The company’s accounts must been made public. This means that competitors can see how well the company is doing.
Test yourself on Limited Liability
Which type of company would find it easiest to get a loan?
Which suffix follows the name of a private limited company?
Public limited companies
Topshop shares are not available for purchase by the public. What type of limited company is Topshop?