What is limited liability? Limited liability is a type of investment in which a partner or investor cannot lose more than the amount invested. Thus, the investor or partner is not personally responsible for the debts and obligations of the company in the event that these are not fulfilled.
The ownership of companies is divided into small units called shares. People can buy these and become “shareholders”- part owners of the business. All shareholders benefit from the advantages of limited liability. Nobody can make any further claim against shareholders. Limited liability assures shareholders that the only potential loss that they risk is the amount of money they have put into the company, not their total wealth. Each year, the company may decide to distribute some of its profit to its shareholders. The money is distributed proportionally according to how many shares you own-which is called a dividend.
A limited company has a legal existence separate ...view middle of the document...
However, high taxes, smaller dividends are some disadvantages of a private limited company. Many private limited companies are very profitable, but these profits become diluted because they have to be distributed evenly among all shareholders. A private limited company is very expensive to establish, as legal fees or other incidentals involved in the business must be paid.
This is the reason why some companies decide to become public. A public limited company is an incorporated business, and is run by the Bord of Directors. It has all the advantages of private company status, plus the right to advertise their shares for sale and have them quoted on the stock exchange, moreover, the original owner is still often able to retain control.
Existing shareholders may also quickly sell their shares if they wish so but it is quite difficult. This flexibility of share buying and selling encourages the public to invest in the business because they can get their money back easily. Many companies start of as a private limited company and later become public to raise capital in order to expand and develop the company, which can play a vital role in the competitive market. Large amounts of capital can be raised in relatively short periods because of the company's size and the security it offers.
Nevertheless, when a private company becomes public, the original shareholder may lose control of the company. Accounts are public which means a lack of privacy and the company has to pay for an auditor to independently check the accounts.
Furthermore, divorce of ownership from control can lead to a conflict of interest, as the aims of the shareholders, directors and management may not be the same. For example, directors may want to grow the business over the long-term in order to increase their power and status whereas shareholders might prefer measures that aim at short-term profits. Thus, shareholders may be expecting a quick, high return on their money.
Following on from this, a public limited company is also at risk from a takeover from an outside body, if they manage to accumulate over 50% of the shares in the company.
In conclusion, owners have many factors to take into account before becoming a public limited company, the advantages and the disadvantages.