Incorporated businesses
Definition
Incorporated business: a business with its own legal identity, separate from the people who own it.
Shareholder: a person or organisation that owns shares in a company and therefore owns part of it.
Dividend: a share of a company's profit paid to shareholders, usually in proportion to how many shares they hold.
- An incorporated business can own property, borrow money and be taken to court in its own name, separately from its owners.
- Because the company owes its own debts, shareholders have limited liability and can only lose the money they invested.
- The company also carries on trading even when owners sell their shares or die, which a sole trader cannot do.
- The cost is more paperwork and less privacy, because a company files annual accounts that anybody, including a competitor, can look up.
Private limited companies
Definition
Private limited company (Ltd): an incorporated business whose shares are sold privately to invited people and cannot be advertised to the general public.
- Owned by a few shareholders: shares go to family, friends and invited investors, and existing shareholders normally have to agree before anybody sells theirs on.
- Control is maintained. Because shares cannot be sold to just anybody, the founding owners keep decision-making inside the group.
- More finance than a sole trader: selling shares raises money the owner could not raise alone, and banks lend more readily to a company.
- Limited liability: a failure costs shareholders their investment rather than their home.
- Profit is shared as dividends. Shareholders receive a dividend in proportion to the shares they hold, but because there are few of them more profit can be kept back to fund growth than in a plc.
- Accounts are not private. Unlike a sole trader, a company must publish its accounts, and there are set-up and accountancy costs to meet.
Example
- Warburtons, the Bolton bakery, is one of the UK's largest food producers and has stayed a private limited company for five generations.
- Staying Ltd means the family keeps control and can invest for the long term.
- The trade-off is that it cannot raise money by selling shares to the public, so growth is funded from profit and borrowing.
Public limited companies
Definition
Public limited company (plc): an incorporated business whose shares can be bought and sold by anybody on a stock exchange.
- It can issue shares to the public. Selling shares on a stock exchange such as the London Stock Exchange raises sums no other structure can reach.
- Limited liability: a shareholder in a plc risks only what they paid for their shares, which is what persuades thousands of strangers to put money into a business they will never run.
- Borrowing is easier. Lenders can see the company's value and its published accounts, so loans are larger and cheaper.
- Control can be lost. Anybody can buy the shares, so the original owners can be outvoted and a rival can mount a takeover.
- Shareholders expect dividends. Profit is spread across many shareholders who want a payout each year, which can push the board towards short-term decisions.
- Scrutiny and cost: detailed accounts are published and reported on, and floating on a stock exchange is expensive in legal and advisory fees.
Common Mistake
- A plc is not owned by the government, because public means the shares are sold to the general public.
- A private limited company has shareholders and pays dividends, but it cannot advertise its shares to the public.
- Both Ltd and plc have limited liability, so any statement giving a company unlimited liability is wrong.
Not-for-profit organisations
Definition
Not-for-profit organisation: an organisation set up to achieve a social, community or environmental aim, where any surplus is reinvested in the cause instead of paid to owners.
Social enterprise: a business that trades like any other but exists to serve a social purpose, reinvesting most of its profit in that purpose.
- Aims: success is measured by the difference made rather than by profit, such as meals served, habitat protected or people housed.
- Control: charities and similar bodies are run by trustees or a committee rather than by owners taking profit out, so decisions are made in the interest of the cause.
- Finance: the money comes from donations, grants, fundraising and legacies alongside revenue from trading.
- That mix can be less reliable than sales, because donations fall when household incomes are squeezed and grants can be withdrawn.
- Distribution of any surplus: nothing is paid out to owners, because the surplus goes back into the work the organisation exists to do.
- The commercial reality: it still has to cover its costs and still closes if the money runs out, so the National Trust charges for entry and runs shops and cafés to fund its conservation work.
Note
- Not-for-profit describes what happens to the surplus, not whether the organisation makes one.
- A charity that takes in more than it spends is doing exactly what it should, because that surplus funds next year's work.
Exam technique
- Expect a multiple choice question worded as which of the following is true for a public limited company?, and a short explain one benefit to a business of being a plc rather than a ltd.
- A longer version reads using Item C, explain one advantage to X ltd of being a private limited company, where the advantage you choose has to be one the item's own facts support.
- Say shareholders rather than owners once a business is incorporated, since that is the precise term.
Self review
- What does it mean to say a company is incorporated?
- State two differences between a private limited company and a public limited company.
- What is a dividend?
- Why is it wrong to say a plc is owned by the government?
- Where does a not-for-profit organisation get its money, and what happens to any surplus?
