- regarded as a privelege
- means that the owners of the business only risk the amount they have invested into the business in the event of failure.
- limited to finance - the amount of capital invested in the bueiness
- the shareholders are not responsible for meeting the debts incurred by the company
- most companies don't have limited liability
- sole trader personally liable for meeting all the businesses debts which means they can be forced to sell thier houses, and other personal possesions, also a possiblilty of bankruptcy
types of business - sole trader
- a form where the individual owns and operates the business
- full financial control
- don't have protection of limited liability
- typically small shopkeepers
- although many soletraders work on thier own, this need not always be the case. but in practice it is unlikely that a single personcould raise the amount of capital for such a small business
types of business - partnership
- a group between 2 and 20
- all contribute capital and expertise
- come may be sleeping partners
- a partnership dissolves on the death, resignation or bankruptcy of a partner, or on the agreed termination of the business
- a deed might cover arrangements for sharing of profits, liabilities in case of debt, continuation after death or resignation of a member etc.
- most partnerships dont have the benefit of limited liability
types of business - companies
- a company is formed through the process of incorpation
- this creates a sperate legal identity for the business
- the creating of a company requires the completion of two major documents: the memorandum of assocation and the articles of assocation
memorandum of assocation states:
- the companys name, and the address of its registered office
- its objectives - the objective may simply be to carru pm nisomess as a general commercial company
- the company's share capital
the artlices of assocation set the rules for the running of the company's internal affairs. These cover:
- the rights of shareholders
- the names and powers of directors
- the rules governing company meetings
private limited companies
In the UK two types of company exsist - private and public limited. Public limited are expensive to create. They are usually much larger than private limited comapies. They can seell thier shares on the stock exchange and are distingusihed by the letters plc after the company name. Private limited companies are smaller, subject to less regulation and have the term Ltd after thier name.
Private limited companies
- suitable for small and meduim-sized operations
- particularly suitable for family firms/small enterprises involving a handful of people
- easier for a business to attract capital because investors have the benefit of limited liability and by being able to get capital in this way, it is easier for the firm to grow
- private limited companies cannot advertise their shares for sale, and as such, they do not have their share prices quoted on the stock exchange. However, they can convert into public limited companies through a process called flotation.
public limited companues
Public limited companies
To become a public limited company, a business must have an issues share capital of at least £50,000. Other requirements include that
- it is a company limited by shares
- its memorandum of assocation has a seperate clause stating that it is a public company
- it publishes an annual report and balance sheet
- its shares are freely transferable- that is, they can be bought and sold.
Public limited companies benefit greatly from their wide access to funds. Being able to sell shares on the stock exchange allows public limited companies to expereince fewer difficulties in raising capitalthan most other types of bussineses.
internal sources of finance
1. reinvesting profits
A business can use its profits in two ways: by distrubting them to shareholders in the form of dividends, or by retaining them for investment in the business. By using profits for investment a business avoids interest charges buy it risks upsetting shareholders who may recieve a lower dividend as a conswquence. Futhermore it is a method of finance only open to firms during profitable trading periods, and even then it may not provide suffiecent funds to purchase more expensive capital assets such as property.
2. working capital
the day to day finacnce required by a business ti pay its bills as they arise. It is needed for fuel, raw materials, wages and other expenses. One way to reduce demands on working capital is to improve the trade credit terms that the business is offered by its suppliers. Many suppliers grant their customers a grant-free period of grace in which to pay for goods and services they have recieved.
3. sale of assets
selling assets that are no longer needed helps to raise cash e.g. lands, building that are surplus. A popular technique of raising funds in recent years has been sale and leaseback. These means that they have capital from the sale as well as continuing use of the assets.
external sources of finance
1. Loan Capital
bank loands are relatively straight forward to arrange if the business which is seeking the credit is solvent and has a satisfactory financial history. the financial instituion advances in a set figure, amd the business makes repayments over an agreed period of time. Normally banks charge about 2 per cent over their base rate of business loans. Interest can be fixed or variable. If the loan is risky, the bank will charge a higher interest. Small businesses can suffer because of this as they tend to regard them as more uncertian prospects than large, more established enterprises. Secuirity is needed for loans, usually in the form of property.
2.Share or equity capital
common- provides both start-up capital and also addditional capital at later stages of business life. Sell a share in business to investors - simply a certfiicate giving the hoilder ownership of part of a company. By selling large numbers of shares, companies raise significant sums of capital. The company needs to convice the prospective shareholders that the buisiness has good prospects in order to prove it will be a good investment. Issuing shares can be expensivem which means it is only appropraite for raising very large sums of capital. There are a number of benefits from selling shares or equity as a source of finance. Although the comapnies will be expected to pay an annual return to share holders(dividends), the level of payment is not fixed and in an unprofitable year it may be possoble for the compant to aviod making any paymrny.
- selective finance for investment in england (grant/loan)
- small firms loan guarantee
-business start up scheme