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An introduction to companies

• A company is an incorporated business that has been formally registered at Companies House

• Companies are considered separate legal entities from their owners

  • This means they can own assets, sign contracts, sue and be sued in their own name

  • Company owners have limited liability for any debts the business incurs, meaning their personal risk is reduced

• Companies can sell shares to raise money

  • Shareholders may receive a share of the company’s profits as dividends

  • They can also benefit from the value of their shareholding increasing when the business performs well

• Companies must make their annual accounts public and are required to have them independently audited

Private limited companies (Ltd)

• Private limited companies are owned by one or more shareholders

  • The business name is suffixed with “Limited” or “Ltd” in the UK

  • Shareholders are often family members or close friends

    • Private limited companies can remain as family-owned businesses for many years, as shares are passed from generation to generation

  • Shareholders are usually also directors who run the business on a day-to-day basis

Examples of private limited companies

• Private limited companies may be more suitable than sole trader or partnership ownership if setting up the business involves significant capital investment or some risk

  • The owner’s personal assets are protected, as they have limited liability

  • Most private limited companies are owned and controlled by just one person (just like sole traders) who has made the decision to reduce their personal financial risks

Advantages and disadvantages of private limited companies

Public limited companies (PLC)

• When a business is growing rapidly, it may require a significant amount of capital to fund its expansion

• To secure this funding, it may choose to transition from a private limited company (Ltd) to a public limited company (PLC)

• Public limited companies are large businesses that sell shares publicly on the stock exchange (e.g. the London Stock Exchange)

  • Public limited companies have the suffix “PLC” in the UK

  • They must publish detailed financial accounts each year

  • They may have many thousands of individual shareholders

    • Each ordinary share allows its owner a vote at the Annual General Meeting

    • Shares are often held by finance companies in pension funds and investment products

Examples of public limited companies

• Selling shares on the stock exchange for the first time is called flotation or going public

• Flotation is a complex legal process that allows large amounts of share capital to be raised

  • E.g. when Applied Nutrition floated in late 2024, around £220m was raised for the firm

Advantages and disadvantages of public limited companies

Reasons for changing business form

• As a business grows, its owner may choose to change its legal structure

• Sole traders may choose to form

  • a private limited company to reduce the increased level of risk, attract new capital or provide for business continuity

• Private limited companies may decide to:

  • float the business on the stock exchange to become a public limited company (PLC)

    • Large amounts of share capital can be raised

    • The original shareholders usually receive significant financial rewards following flotation

    • However, they are likely to lose some control over the business as ownership is diluted

  • form a joint venture with other businesses to achieve a specific objective

    • A separate limited company is established for the duration of the joint venture and is usually dissolved upon its completion

Examples of businesses that changed legal form