Passage 5
Introduction to Companies
The General Nature of Companies
【(56)A company is a form of business organization which is owned by all those who invest in it.】 These investors are known as shareholders as they own or "hold" a share of the company. The size of their share of the company will depend upon the amount of money they have invested in it.
The total investment by all of the shareholders is known as the share capital of the company. Thus, unlike a sole trader, where one person owns the business, or a partnership, where a small number of people own a business, a company may be owned by several hundred or even several thousand shareholders.
Obviously, all of these people cannot be involved in running the company. Instead, the shareholders appoint directors to run the company on their behalf, if the directors run the company efficiently and make a profit, the shareholders will receive a dividend each year as a return on their investment.
Characteristics of Companies
The characteristics of companies differ in several respects from both sole traders and partnerships. The following are among the more important differences.
Separate Legal Entity
【(57) A unique feature of a company is that, no matter how many individuals have bought shares in it, it is treated in its dealings with the outside world as if it was person in its own right.】 It is said to be a separate legal entity. Just as the law can create this separate legal person, so also can it eliminate it, but its existence can only be terminated by using the proper legal procedures.
Thus, the identity of the shareholders in a large concern may be changing daily as shares are bought and sold by different people. On the other hand, a small private company may have the same shareholders from the date it is incorporated (the day it legally came into being), until the date when liquidation is completed (the cessation of the company, often known also as "winding up" or being "wound up"). A prime example of its identity as a separate legal entity is that it may sue its own shareholders, or in turn be sued by them.
Limited Liability
Most companies are "limited" companies. This means that any shareholder who has paid for the share (s) which he has bought cannot be forced to pay more money into the company if, for example, it is making losses or has gone into liquidation. 【(58)Thus, the maximum amount of money any shareholder can lose by investing in a company is the amount he has invested.】 Unlike in sole traders or partnerships shareholder in a limited company cannot be forced to sell his house, car, etc. to pay the debts of the business.
If a shareholder has not paid in full for the shares he has agreed to buy, he can be forced to pay the balance owing on the shares. Once he has paid that amount he cannot be forced to pay any further amount. Thus, his liability is limited to the amount he has agreed to pay but has not yet paid.
This is known as limited liability and the company is known as limited company. It is important to note that it is the liability of the shareholders that is limited not the liability of the company. 【(59) Companies can incur debts well beyond what they are able to pay and therefore their liabilities can exceed their assets.】
There are, as will be seen later, some companies, known as unlimited companies, in which the liability of the shareholders is not limited. Limited liability and the ability to raise large amounts of finance are the principal reasons why limited companies are the most common form of business organization.
Public Companies and Private Companies
Broadly speaking, there are two classes of company, the public company and the private company. Public companies are also known as PLCs, that is, public limited companies.
A private company may not have less than two, or more than fifty, shareholders (excluding employees and ex-employees) and may not offer its shares to the general public. Once some someone has purchased shares in a private company the right to transfer those shares to someone else is severely restricted.
A PLC is a company which fulfils the following conditions:
.It must be able to issue share capital of at least 30, 000;
.It must have at least seven shareholders. There is no maximum:
.Its name must end with the words "public limited company" the abbreviatic "ple".
A private company is usually, but not always, smaller than a public company.
The shares that are dealt in on the Stock Exchange are all of public limited companies. This does not mean that all public companies' shares are traded on the Stock Exchange, as, for various reasons, some public companies have either chosen not to, or not been allowed to, have their share traded there. The ones that are traded in are known as quoted companies or listed companies meaning that the price of shares in them is quoted (or listed) by the Stock Exchange. Quoted companies have to comply with Stock Exchange rules and regulations.
Share Capital and Dividends
A shareholder in a limited company obtains his reward for investing in the form of share of the profits, known as a dividend. 【(60)The directors decide how much of the profits is to be retained in the company and used for expansion】. Out of the profits remaining they propose the payment of a certain amount of dividend. The shareholders cannot propose a dividend for themselves higher than that already proposed by the directors They can, however, propose that a lesser dividend should be paid, although this action is very rare. If the directors propose that no dividend be paid, then the shareholders are powerless to alter the decision.
The decision by the directors as to the amount proposed as dividends is a very complex one. Such matters as the effect of taxation, the availability of bank balances to pay the dividends, the possibility of take-over bids and so on will all be taken into account.
Dividends are usually expressed as a percentage of the share capital. A dividend of 10% in Company A on 500, 000 Common Shares of ￡ 1 each will amount to ￡ 50, 000, or a dividend of 6% in Company B on 200, 000 Common Shares of ￡ 2 each will amount to ￡ 24, 000. A shareholder having 100 shares in each firm would receive ￡ 10 from Company A and ￡ 12 from Company.
What are the major differences among companies, sole traders and partnerships according to the passage?
First, it is separate legal entity. A unique feature of company is that, no matter how many individuals have bought shares in it, it is treated in its dealings with the outside world as if it was a person in its own right. Just as the law can create this separate legal person, so also can it eliminate it, but its existence can only be terminated by using the proper legal procedures.
Second, it is limited liability. Most companies are "limited"companies. This means that any shareholder who has paid for the share(s) which he has bought cannot be forced to pay more money into the company if, for example, it is making losses or has gone into liquidation. Thus, the maximum amount of money any shareholder can lose by investing in a company is the amount he has invested.
If a shareholder has not paid in full for the shares he has agreed to buy, he can be forced to pay the balance owing on the shares Once he has paid that amount he cannot be forced to pay any further amount. Thus, his liability is limited to the amount he has agreed to pay but has not yet paid.