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Understanding Business Structures Purchasing a business is a major investment – both in finances and in personal time and energy. As countless business owners have come to know, however, it can also be an unparalleled rich and rewarding venture – both in monetary gains and in personal freedom and opportunity. Not all business, however, are created equally, and potential buyers wanting to make the best possible purchasing decision should first make sure that they understand the basic business structures operating in the UK market. Only then will they be able to weigh their purchasing options against the various company types and determine where their best investment lies.
UK companies may be structured in several different ways.
For the purposes of study, the descriptions below address two main distinctions that identify various companies.
1) Private versus Public
2) Limited Liability versus Unlimited Liability
a. Limited by Shares
b. Limited by Guarantee
Prior to delving into these distinctions, however, a few definitions are in order:
Authorized or Nominal Capital – Authorized or nominal capital, also called registered capital is an amount determined by the individual company and calculated according to the number and value of the company’s shares. Companies are bound by this number and may not issue shares exceeding the nominal amount. Although companies structured as limited liabilities will state the authorized capital amount in the company’s registration documentation, the amount may later be changed by a shareholder vote.
Issued Capital – Issued Capital or Issued Shares are those promised by contract to a particular shareholder. This may be done upon request of the shareholder. If the request is accepted by the company, and often after the shareholder submits payment, the company grants the shareholder the title to these shares.
Members/Shareholders – Also known as owners, members or shareholders are those who hold ownership of a company. For the most common types of companies, the members/shareholders may be only one person. Private companies, particularly, are only required to have one member/shareholder. While members/shareholders are often actual people, they may also be other companies.
With these definitions in mind, consider the following business structures:
Public Companies Versus Private Companies
The primary distinguishing feature of a private company is that it may not offer company shares for public sale. Private companies are the most common structural choice for small businesses, partly due to their relative ease of launch as compared with a public company. For instance, private companies require much less capital in order to register than do public companies.
Additionally, private companies must abide by far fewer regulatory requirements than their public counterparts. Whereas public companies cannot begin operations until they receive a trading certificate from the Registrar of Companies, private companies need only receive a certificate of incorporation before they begin conducting business.
Public companies are characterized by their ability to sell shares and interest on the public market in order to fund business operations. Unlike private companies, public companies must possess a significant amount of capital in order to register. Additionally, public companies are permitted to obtain a listing on The Stock Exchange.
Limited Liability Versus Unlimited Liability
A limited liability company is one which is either limited by shares or limited by guarantee. Among companies in general, limited liability companies are more common than unlimited liability companies, and among limited liability companies, those limited by share are more common than those limited by guarantee.
According to the Companies Act of 1985, a company limited by share means that the liability assigned to the owners or shareholders is not greater than the amount owed by the shareholders on the shares. Conversely, a company limited by guarantee means that the liability assigned to the owners or shareholders is not greater than the determined amounts which each of the shareholders separately decide to contribute to the company if the business fails. For purposes of example, most profit-aimed businesses operate as companies limited by shares.
An unlimited liability company is one in which, in the event the business fails, each of the shareholders or members accepts liability for all the responsibilities of the company. Unlimited liability companies lend themselves well to situations in which the shareholders or owners desire to keep the financial operations of the company hidden from public view and in which there is little risk of inability on the company’s part to meet financial obligations.
Unlimited liability companies would most often operate in instances in which trade is not a business aim, and an example of an unlimited liability company might be a service-aimed organization.
This said, however, unlimited liability companies are rare.
Given the variety of structure within the business market, one can understand the necessity of careful evaluation of all options prior to purchasing a business.
Questions that need to be asked include:
1) How will business operations be funded – i.e. publicly or privately?
2) What interest and financial commitment will shareholders have in this business – i.e. limited by share, limited by guarantee, or unlimited?
3) How many members/owners will this company have – i.e. will the shareholders/members be one and the same person; will a group of individuals fill these roles, or will a combination of individuals and outside firms constitute the business’s membership?
As potential buyers seek to follow the most profitable investment opportunities, asking and answering these questions will prove invaluable in making a financially sound business purchasing decision.
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