Private and Public Limited Companies Overview

Private Limited Companies

• A detailed document outlining rules and regulations for company management, operations, shareholder/director governance, general meetings, dividends, and profits is the Articles of Association.
• Features:
  • Must include "ltd." in the company name.
  • A separate legal entity.
  • Requires a memorandum and articles of association.
  • Moderate ability to raise capital through private shareholder sales.
• Advantages:
  • Limited liability.
  • Owners have full control without interference.
  • Business continuity even if shareholders retire.
  • Shared workload.
• Disadvantages:
  • Potential conflicts among owners.
  • Limited capital raising potential.
  • Adherence to corporate regulations, annual returns, and accounting procedures.

Public Limited Companies

• Features:
  • Minimum of 7 shareholders with no maximum limit.
  • Shares can be publicly traded on the stock exchange.
  • Company name must include "PLC" or "INC".
  • High capital raising potential through public share sales.
  • Increased likelihood of bank/lending institution financing due to public status.

Sole Trader

• A sole trader, also known as a sole proprietor, is a business owned and run by one person.
• Features:
  • Unlimited Liability: The owner is responsible for all debts of the business.
  • Decision Making: The owner makes all decisions solely.
  • Taxation: Income is taxed as personal income.
  • Finance: The owner's personal savings are used to finance the business.
• Advantages:
  • Control: The owner has full control over the business.
  • Simplicity: Easy to establish.
  • Tax Benefits: Simple tax structure; profits are taxed as personal income.
• Disadvantages:
  • Unlimited Liability: No separate legal entity.
  • Workload: The owner bears the entire workload and responsibility.
  • Limited Finance: Difficult to raise large amounts of capital.

Partnerships

• Partnerships are business organizations owned by two or more people who share responsibilities, profits, and liabilities toward a common goal.
• Features:
  • Ownership: Owned by two or more persons.
  • Liability: General partners have unlimited liability, unless it is a limited partnership.
  • Decision Making: Decisions are made collectively with varying levels of authority based on the partnership agreement.
  • Taxation: Income is passed through to partners and taxed as personal income.

Limited Partnerships

• Limited partnerships consist of no more than 20 people.
• They must have one or more general partners who are liable for all debts and obligations of the company.
• Limited partners' liability is limited to their capital contribution.
• They do not deal with day-to-day operations.
• To start a limited partnership, a partnership agreement (deed) must be created.
• This agreement outlines the:
  • Partnership name.
  • Nature of the business.
  • Start date.
  • Amount of capital contributed by each partner.
  • Profit and loss division arrangement.
  • Role of each partner.
  • Voting rights.
  • Duration of the partnership.

Tertiary Sector

• Examples:
  • Retail
  • Healthcare
  • Education
  • Financial Services
• Advantages:
  • Employment opportunities
  • Economic contribution
  • Service delivery
• Disadvantages:
  • Service quality (due to the size of the sector)
  • Training cost
• Characteristics:
  • Consumer interaction
  • Variety
  • Economic contribution

Primary Sector

• Examples:
  • Coffee plantation
• Advantages:
  • Open employment opportunities, creating jobs in rural areas.
  • Resource availability, using the country's resources.
  • Foundation for other sectors, providing materials for secondary and tertiary sectors.
• Disadvantages:
  • Environmental impact, leading to environmental degradation if not managed sustainably.
  • No potential to earn revenue.
  • Decrease in demand.

Secondary Sector

• Additional Notes:
  • Construction
  • Manufacturing
  • Textile production
  • Food processing
• Advantages:
  • Earn foreign exchange for exported products
  • Reduce the amount of imported goods
  • Employment creation
• Disadvantages:
  • High initial cost
  • Environmental concerns (manufacturing processes can lead to pollution and resource depletion)
  • Economic fluctuations (susceptible to economic cycles)

Joint Ventures

• A joint venture (JV) is a strategic partnership formed between two or more independent companies to collaborate on a specific project, venture, or business.
• In a joint venture, the companies share both the profits and the risks.
• Each partner usually contributes capital/resources.

Reasons for Joint Ventures

• Risk Sharing: Allowing businesses to pool their resources together and share risks.
• Cost Sharing: Makes large-scale initiatives more feasible.
• Technological Advances: Development of new technology.
• Access to Capital: Access to capital, resources, and partners.
• Market Expansion: Strategy to expand and reach a broader customer base.

Types of Joint Ventures

• Licensing: A company enters into an arrangement with a licensee in a foreign market. For a fee or royalty, the licensee produces the company's product or uses the company's manufacturing processes.

Advantages of Cooperatives

• Democratic Control: Each member has equal voting power.
• Shared Profits: Profits are distributed among members, fostering loyalty and commitment.
• Social Objectives: Cooperatives often prioritize social or community goals, making them more sustainable.

Disadvantages of Cooperatives

• Limited Access to Finance: Raising capital can be difficult without external investors.
• Slow Decision-Making: Democratic decision-making can be slow, especially in large cooperatives.
• Profit Sharing: This may reduce incentives for higher individual performance.

Regulations

• Public Limited Companies:
  • Must have a minimum of 7 shareholders, but no maximum limit.
  • Shares can be sold on the stock exchange.
  • Must include PLC or INC in the company title.
  • High ability to raise capital due to selling shares to the public.
  • Banks and lending institutions are more likely to provide finance due to the size and public status of the company.
• Advantages:
  • More investors
  • Unlimited potential for capital
  • Limited liability
  • Increased credibility
  • Shares are transferable / continuity
• Disadvantages:
  • Conflicts
  • Less control
  • Costly

Franchises

• Franchises are businesses where a franchisee is granted rights to operate using the franchisor's (parent company) branding, products, and operational model.
• Financing is easier when using an established brand.

Types of Franchises

• Business Format Franchises: A company expands by providing independent business owners with an established business, including its name and trademark.
• Product Franchises: Manufacturers control how retail stores distribute their products. Manufacturers allow retailers to distribute their products and use the manufacturer's name and trademarks.
• Manufacturing Franchises: (This category appears incomplete)

Ability to Raise Finance

• Strong: Franchises have more access to finance due to the established brand, proven business model, and support from the franchisor. This makes banks more willing to provide loans.

Appropriateness of Legal Structure

• Franchises are appropriate for entrepreneurs who want to operate a business with reduced risk, as they benefit from an existing brand, marketing, and operational support.
• However, franchisees have limited freedom to innovate or make independent decisions.

Challenges of Changing Legal Structure

• Changing from a franchise to an independent business is challenging due to strict contractual obligations.
• Franchisees are bound by franchise agreements, which control many aspects of the business.

Advantages

• Lower Risk: Operating an established business model reduces the risk of failure.
• Brand Recognition: Instant access to a recognized brand and established customer base.
• Support from franchisor: Franchisees receive support from the franchisor.

Disadvantages

• Limited control: Franchisees must adhere to the franchisor's rules, limiting their autonomy.
• Franchise Fees: Franchisees must pay initial fees and ongoing royalties, which can cut into profits.
• Reputation Dependency: If the brand suffers nationally or globally, individual franchises may suffer too.

Co-operatives

• A co-operative enterprise is owned and operated by a group of individuals for their mutual benefit.
• These members share profits and decision-making responsibilities.

Ability to Raise Finance

• Moderate: Co-operatives can raise capital through member contributions, loans, or government grants, but accessing traditional finance (e.g., bank loans, issuing shares) can be difficult due to their member-based ownership.

Appropriateness of Legal Structure

• Co-operatives: Ideal for small groups or communities with shared interests. They are governed democratically, with each member having an equal vote, regardless of investment size.
• Structure suitability: This structure works well when the goal is mutual benefit over profit maximization.

Challenges of Changing Legal Structure

• Transitioning from a co-operative to another legal structure can be challenging, particularly due to the democratic ownership model.
• Members may resist changes that reduce their control or financial benefits.

This quiz explores the key features, advantages, and disadvantages of Private and Public Limited Companies. Understand the regulatory requirements, shareholder dynamics, and capital raising potential associated with each type of company structure. Perfect for students of business law or corporate governance.