Companies (Cambridge (CIE) IGCSE Business): Revision Note

Private limited companies

• A private limited company is a business owned by private shareholders with limited liability and restricted share sales

  • The ownership of the private limited company is broken down into a specified number of shares

    • These shares can be held in their entirety by the entrepreneur, sold to friends and family or to venture capitalists

    • These owners are called shareholders

  • Private limited companies are registered

    • They need to submit details of financial performance and any changes in ownership each year

• An entrepreneur may choose to form a private limited company to provide more financial security, as they will benefit from limited liability

• Decision-making often rests with the person appointed to run the company, often called the Managing Director or CEO

• 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

Evaluating private limited companies

Limited liability

• Limited liability means that owners (shareholders) of private limited companies and public limited companies can only lose the original amount they invested in the business if it fails

Implications of limited liability

• 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

  • For example, in 2018 construction company Carillion entered liquidation and the shareholders lost their investments

• In most cases, shareholders cannot be held responsible for unlawful acts committed by those connected with the business

• Limited liability can encourage investment because shareholders know their personal assets are protected

  • This makes it easier for companies to raise capital, as more people are willing to buy shares

• Owners can take more business risks, knowing their personal assets are not at risk

Public limited companies

• A public limited company is a company whose shares can be sold on a stock exchange to the public, with shareholders having limited liability

  • When a business is growing rapidly, it may require a significant amount of capital to fund its expansion

  • To secure this funding, it may choose to transition from a private limited company (LTD) to a public limited company (PLC)

  • This is a complex legal process that involves undergoing a stock market flotation

  • Public limited companies sell their shares to the public on the stock exchange, meaning they can have a large number of owners

• They must publish their annual reports and hold an AGM each year

  • A board of directors, whose members are elected by shareholders at the AGM, acts as the governing body of a company,

  • The board of directors appoints a CEO to lead the company

Evaluating public limited companies