GCSEBusinessOCRRevision Notes1. Business Activity1.3 Business OwnershipCompanies

Companies (OCR GCSE Business): Revision Note

Exam code: J204

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Updated on

What is limited liability?

  • Sole traders and partners have no legal protection from financial loss as a result of business failure

    • The business assets and the owner's personal assets are viewed as being the same

    • This is known as unlimited liability

    • If a business runs into financial difficulty, the personal assets of owners may be used to pay debts

  • Companies offer limited liability protection to their owners

    • The assets of the owners, known as shareholders, are considered to be separate from those of the business

    • They cannot be used to meet business debts

    • Shareholders may lose their initial investment in the event of business failure

Comparison of limited and unlimited liability

Liability

Description

Implications

Unlimited liability

  • Sole traders and partners are fully responsible for all debts owed by the business

  • Owners are also legally responsible for any unlawful acts committed by those connected to the business

  • There is no legal distinction between owners with unlimited liability and the business

  • As a result, these business owners may have to use their own  personal assets to pay debts or legal fees

  • E.g. A sole proprietor may need to sell their home to pay  creditors if their business fails

Limited liability

  • Owners (shareholders) of private limited companies and public limited companies can only lose the original amount they invested in the business if it fails

  • Shareholders are not responsible for business debts

  • Shareholders are not held responsible for unlawful acts committed by the management or employees of the company

  • Companies are  incorporated and owners are considered a separate legal entity to the business 

  • This means that if a company fails, the owners would lose their investment (shares) but would not have to use their assets to meet additional debts or legal fees

  • E.g. In 2018 construction company Carillion entered liquidation and the shareholders lost their investments

Private limited companies

  • A private limited company is a business that is owned by one or more shareholders

    • The business name is suffixed with 'Limited' or 'Ltd' in the UK

    • Shareholders are often family members or close friends

    • Shareholders are usually also directors who run the business on a day-to-day basis

    • Private limited companies are registered with Companies House and need to submit details of financial performance and changes in ownership each year

Examples of UK-based private limited companies

Some of the UK's best-known brands, including River Island, Iceland and JCB, operate as private limited companies

Some of the UK's best-known businesses, including River Island, JCB and Specsavers operate as private limited companies

  • Private limited companies may be more suitable than sole traders or partnerships if setting up the business involves significant capital investment, or involves some risk

    • The owners personal assets are protected as they have limited liability

    • Most private limited companies are owned and controlled by just one person (just like sole traders) who has made the decision to reduce their personal financial risks

  • Some large businesses choose to remain as private limited companies

    • Family shareholders can retain control over the business

    • Shareholders prefer to avoid the scrutiny that comes with flotation

    • They may have little need to raise large sums of capital and can fulfil their objectives as a private limited company

Evaluation of private limited companies

Advantages

Disadvantages

  • Shareholders benefit from limited liability for debts incurred by the company

  • Access to greater finance from investors and lenders who consider limited companies to be less risky

  • Ownership can be easily transferred by selling shares

  • Business continuity, as the business does not die with its original owner

  • It is more expensive and time-consuming to set up as legal advice is often required

  • More complex operational rules than sole traders or partnerships

  • Annual financial reporting and auditing are required

  • Shareholders may have little control over the company as the founder usually imposes their own agenda

Examiner Tips and Tricks

A common misconception is that private limited companies are large. They could be large businesses but equally, they can consist of just one key shareholder who has chosen this legal structure as a way to protect their personal assets with limited liability.

Public limited companies

  • Public limited companies are large businesses that sell shares publicly on the stock exchange

    • Public limited companies have the suffix 'PLC' in the UK

    • Selling shares on the stock exchange for the first time is called flotation or going public

    • Flotation is a complex legal process that allows large amounts of share capital to be raised

      • E.g. London Tunnels, which turns unused Second World War walkways and shelters into tourist attractions, expected to raise £30 million through its flotation in early 2024

Evaluation of public limited companies

Advantages

Disadvantages

  • Significant amounts of capital can be raised during flotation

  • Risks are spread among a large group of shareholders

  • Company shares can be bought and sold easily on a public stock exchange

  • A board of directors, made up of individuals from outside of the company management and major shareholders, can bring in expertise/perspectives that can promote growth

  • PLCs have high visibility with customers, suppliers, and potential investors, which can help grow its customer base

  • As large businesses, PLCs  may be able to dominate the market and benefit from economies of scale

  • PLCs must comply with complex legal and financial regulations, such as:

    • Completing regular financial reports

    • Maintaining accurate accounting records

    • Holding annual general meetings

  • Setting up a public limited company can be expensive 

    • Fees for legal and accounting advice

    • Costs of the flotation, such as producing a prospectus 

  • Short-term financial performance (e.g. paying staff less) is prioritised over long-term strategic planning (retaining talented staff) to maximise profits for shareholders

  • Hostile takeovers are a risk, as shares can be bought by rival businesses 

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    Author
    Reviewer
    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

    Steve Vorster

    Reviewer: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.