9 - Limited Liability companies - choosing the right legal structure (1.4 in spec)

10/10 Key term test.  This weeks words include:

1. Incorporation - The process of forming a limited liability company such as a LTD or PLC
2. Limited Liability - investors (shareholders) in a private limited company can loose their investment if the business fails but they cannot be forced to sell their own assets to pay off the firms debts 
3. Companies House - this is the organisation where new incorporated companies need to be registered and manages the steps involved with setting up a limited liability company.  www.companieshouse.gov.uk 
4. Legal structure - the way a business is set up legally to operate.  This determines who will be taking the risk and sharing in the rewards
5. Shareholder - the owners of a limited liability company
6. LTD - The abbreviation for a private limited company
7. Director - These people are appointed by shareholders to decide on company decisions and run the company so that it achieves its aims and objectives
8. Ownership - The person or organisation that have a share in the ownership of that business. If a person or company has over 50% of the shares they are said to have a controlling interest in the business
9. Control - The owner, director or managers of a company that have all the power.
10. Separate legal identity - An enterprise that is established and is separate to its owners with limited liability.  It can operate in its own name, own assets and owe money, sue other and be sued.  These key terms will be tested w/c 13th October 2013

Exam board specification and expectations for this section
Candidates should know the benefits and drawbacks of the different legal structures, including the appropriateness of gaining limited liability status and the consequences of increasing the number of stakeholders (sole trader, partnership, private limited company or LTD)

Limiting liability is a method introduced to protect investors form loosing only their investment if the business fails.  People that buy shares or invest in a company do so for a share in the profit. They do not generally have any say in how the company runs as they rely on the manager and directors.  Limited liability ensures that if the company fails the only thing that the investors loose is the money that they invested in the first place. They will not be expected to sell their car and house to pay the money back.

To limit your liability you need to create a PRIVATE LIMITED COMPANY.  The business goes through a process called INCORPORATION in order to achieve this limited liability status.

To be protected with this limited liability the business needs to be operating properly and is SECURE. A limited company is identified by the abbreviation LTD. A PRIVATE limited company is expected to put these abbreviation next to its name.  This will warn suppliers that the company is protected and that they may not get paid if the business fails in the future.

SHARE sales are restricted and cannot be sold to the public.  Often it is the immediate FAMILY ONLY who have these shares or people who work in the business. If a business is a high risk venture it may be best to set it up as a limited company i.e. RESTAURANT.  Limited liability companies need to SUBMIT their end of year accounts every year to COMPANIES HOUSE so that they can be recorded and available for anyone to see 

In summary LIMITED LIABILITY means:

Questions you will need to be able to answer in an exam on limited liability companies

1. What is a CREDITOR?
2. What does the abbreviation LTD stand for?
3. What is a SHAREHOLDER?
4. Why would investors be more willing to put money into a limited company?
5. What is the role of a DIRECTOR?
6. Why might a business find it difficult to EXPAND without limited liability status?
7. Why might a business not want its financial accounts to be available to the general public?
8. Why might a member of the general public be reluctant to buy shares in a private limited company?
9. Why would a supplier want to know if a customer had placed an order was a limited company?
10. Is limited liability a good thing? Why do not all businesses become limited companies?

Worksheets

Private companies

Limited and unlimited liability

9 mark questions - Sport Alive

•Sports Alive Ltd is a private limited company.  It is a family owned business that runs a chain of 

sports clothing shops.  Some members of the family want the business to grow quickly in the future.  

They believe the business should float and become a public limited company.

•Discuss the advantages and disadvantages to the owners of Sports Alive of becoming  a public 

limited company.(9 marks)