Think what happens if a
sole trader incorporates to a company. The legal structure changes from ‘unincorporated’
to ‘incorporated’. The new legal structure will have specific benefits and
limitations for being a company; no matter, private limited company or public
limited company.
If you have referred the previous post,
you might have already gathered knowledge on sole traders. So this post is not
repeating the same.
This time, think a case of a business operating as a company.
Say, Laura owns a company.
Here, Laura has incorporated the
business as a company following complex legal formalities. She has presented ‘Article
of Association (AOA)’, Memorandum of Association (MOA), and Prospectus (as
required) to Company Registrar’s Office (CRO) for approval before operating the
business. After approval the company has its own legal personality different
than Laura herself. It has its own identity including its own name, address,
objectives etc. as stated on approved MOA. It has its own working pattern
including number of board member, requirement for a decision etc. as outlined
by approved AOA. Such separate legal entity encircles any of its liability
within its own resources. This has benefited Laura as her personal property is
not at risk. The liability of Laura is limited to the amount she has invested
in the company.
As the owner, Laura will be a
shareholder of the company. She will be purchasing the shares of the
incorporated business and providing capital for its operation. She might be the
single owner again (similar to the sole trader) or might have other shareholders
as owners. If she has other shareholders, the business can raise higher capital
required its operation. Other owners might be known (if private limited
company) or unknown general people (if public limited company).
Note: Refer to my previous post for an
analysis of CIE A-level Business question on the issue: ‘Business with a single
owner is a sole trader or a private limited company?’
For the company having separate legal
entity different than that of Laura, the benefits also comes in two types.
Company will be benefited on one side and Laura will be benefited on other
side. CIE A-level Business might query on any part or both.
In this case, access to higher capital
is the benefit to the company. With higher capital, business is able to grab
better opportunity and can earn more profit that gives higher return in the
form of dividend to Laura or she gains higher value of her investment.
Laura is also glad that her efforts on
business will not go in vain. She can transfer the shares to any other and her business
continues. Even if she dies, shares will be transferred to her nominees and
business continues.
CIE A-level Business expects such
understanding and prefers to ask whether a sole trader should be converted to a
company. The recommendation should include benefits or drawbacks to the owner
like Laura for being incorporated. Key words like limited liabilities,
continuity, higher capital raising option etc. are to be covered for proper evaluation.
Now, let’s think other conversion of legal structure within
incorporated ones. Laura is operating Private limited company with three of her
friends; however, she is thinking to go public.
With private limited company, Laura
along with her three friends are known shareholder and shares are transferable
with consent of all. But if it goes public, shareholders will be general
people. The company has to go with additional complex legal formalities. It has
to be listed under stock exchange as well.
Being private limited company, Laura
(along with her friends) is privileged with unlimited liabilities and
continuity. If company goes public, her privilege will still remain. In
addition, Laura will be able to have easy exchange of shares without anyone’s
consent that is a requirement in private limited company. For that additional
benefit, more investors / shareholders will be enticed and business can easily
raise its required capital. Further, growing to public limited company provides
higher capital from general people even providing higher status to the
business. However, Laura might be afraid
if an outsider takes over and her control from the business might be lost as
shares will be floating in the market.
CIE A-level Business prefers to ask
questions on such issue as well. It might ask to evaluate the issue whether to
go with public or not. The recommendation should include floating shares, easy
exchange of share, capital availability etc.
So here comes The clue.
If CIE A-level Business provides issue on conversion of sole traders to private
limited company, focus on relative differences being incorporated from being
unincorporated. Along with keys like limited liabilities, continuity etc., the
recommendation might include higher capital with additional shareholders. If
CIE A-level Business questions on issue related with conversion of private
limited company to public limited company, try to escape the above mentioned
difference between incorporated and unincorporated and cover other keys like
easy exchange, higher status, risk of takeover etc.
(To be continued... further will be posted soon)
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