What is the primary difference between limited and unlimited liability?

In unlimited liability, owners are personally responsible for all business debts, risking their private assets. In limited liability, the owner's loss is restricted to the amount they invested in the company.

How does the sale of shares differ between an Ltd and a PLC?

An Ltd sells shares privately to known individuals (friends/family) and requires board approval for transfers. A PLC sells shares to the general public via a stock exchange, allowing anyone to buy or sell them freely.

Why might a large company choose to remain an Ltd rather than becoming a PLC?

Remaining an Ltd allows the owners to maintain full control, avoid the high costs of flotation, and keep financial performance details more private from competitors and the public.

What is the 'divorce of ownership and control' in a PLC?

This occurs when the shareholders (owners) are not the same people as the directors (managers). This can lead to a conflict of interest where managers pursue their own goals rather than maximizing shareholder value.

True or False: If a company with limited liability goes bankrupt, its creditors can sue the shareholders for the remaining debt.

False. Because the company is a separate legal entity, the shareholders' liability is limited to their investment. Creditors cannot claim the shareholders' personal assets to settle the company's debts.

What is a common misconception regarding the size of Private Limited Companies?

The misconception is that all Ltds are small businesses. In reality, an Ltd can be a massive international corporation or a single-person business; the 'Ltd' status refers to the legal structure, not the scale of operations.

Define 'Incorporation'.

Incorporation is the legal process of forming a corporate entity that is recognized as a separate legal person from its owners, providing the basis for limited liability and business continuity.

Flotation is the process of a private company 'going public' by issuing shares on a stock exchange for the first time to raise capital from the general public.

What is a 'Dividend'?

A dividend is a portion of a company's profit that is paid out to shareholders as a reward for their investment, typically calculated as a fixed amount per share held.

What is a 'Hostile Takeover'?

A hostile takeover occurs when an outside entity acquires a controlling interest in a PLC by buying shares on the open market against the wishes of the company's current board of directors.

Companies | OCR GCSE Business

Companies

Summary

A company is a business structure that is legally incorporated, creating a distinct legal entity separate from its owners. This separation provides shareholders with limited liability, protecting personal assets while enabling the business to raise capital through the sale of shares.

1. Definition & Core Concepts

Incorporation: This is the legal process by which a business is recognized as a separate legal person from its owners. This means the company can enter contracts, own property, and be sued in its own name.
Shareholders: These are the owners of the company who provide capital in exchange for shares. Their primary role is to provide funding, though in smaller companies, they often manage operations as well.
Limited Liability: A fundamental protection where shareholders are only responsible for business debts up to the value of their investment. If the company fails, personal assets like homes or savings cannot be seized to pay creditors.

Diagram comparing unincorporated businesses where owner and business are one entity, versus incorporated companies where a legal wall separates the owner from the business entity.

2. Private Limited Companies (Ltd)

Ownership Structure: Shares in an Ltd are typically owned by a small group, such as family members or business partners. These shares cannot be traded on a public stock exchange and require the consent of other shareholders to be sold.
Operational Control: The founders usually retain significant control over the business's direction. Because they are not subject to the same public scrutiny as larger firms, they can focus on long-term objectives without pressure from external investors.
Regulatory Requirements: While more private than public firms, they must still register with national authorities (like Companies House) and submit annual financial statements, ensuring a level of transparency for lenders.

3. Public Limited Companies (PLC)

Stock Exchange Listing: A PLC offers its shares to the general public through a process called flotation. This allows the company to raise massive amounts of capital from thousands of individual and institutional investors.
Divorce of Ownership and Control: In large PLCs, the owners (shareholders) are often distinct from the managers (Board of Directors). This can lead to conflicts if directors prioritize short-term growth over the shareholders' long-term interests.
Market Visibility: Being a PLC increases a brand's prestige and visibility. However, it also exposes the company to the risk of hostile takeovers, where a rival buys enough shares to gain controlling interest against the current management's wishes.

4. Key Distinctions

5. Exam Strategy & Tips

6. Common Pitfalls & Misconceptions