By:

Legal Infrastructure for Business: Understanding Companies

 

A company is a business structure that runs as one unit but is owned by multiple people or partners. Each partner has a share in the profit/loss and that is based on their investment. More investment equals a bigger share.

Companies take on an identity of their own once they have been registered and given a name. This means that after it receives approval from legal authorities the company can open bank accounts, own assets, face lawsuits, make agreements, borrow and extend loans and debts as an independent legal character.

A company, once it has been established becomes separate from its owners. The individuals who started it might leave the company and be replaced with others but until there is someone there to fund its workings and manage it, the company will stand.

There are two types of companies:

1. Private Limited Company
2. Public Limited Company

In this piece we are discussing the advantages and disadvantages of the company model. The purpose is to help new business owners analyze if this business structure suits their needs.

Private Limited Company

Usually a Private Limited Company will have between 2 to 7 partners. These partners might be those who founded the company or those founders may take other investors on as well. Therefore, usually new partners will be found through networking.

Public Limited Company

In Public Limited companies there is no limit of shareholders. So when you hear about people buying company stocks and shares it’s for these public companies.

Let’s take a look at the pros and cons now.

1. Limited Liability

Unlike sole proprietorships and partnerships, in companies the lender of a debt cannot retrieve it through the company owner’s personal assets. Liability is limited to the assets purchased by the company. No shareholder is responsible beyond the limit of their shareholding in the company.

2. Attracting investments is easier

In a Public Limited companies are attractive opportunities for anyone looking to invest, since anyone can buy shares and assets and there are no limits.
Therefore, if a company is doing well or if a startup is showing potential, their chances of attracting investments and thus increasing liquidity are higher.

1. More legal work

The initial setup involves a lot of paperwork as there are shareholders and a policy for company stocks have to be set.

At every stage of its life a company requires legal workings which requirea legal team and so that is a lot of work, and also a lot of money.

In addition to all this, annual audits are compulsory for all companies and so the owners have to hire a professional auditor. This also means that things have to be made public, especially if it is a Public Limited Company.

2. Management is separate from owners

The managers and owners are usually separate from each other. The owners are essentially just investors and they will hire managers and staff to manage and run the company.

This could be seen as an advantage as well if you are someone who has an idea and some capital to invest and launch it, but don’t think you have the experience or knowledge to run that business. This is, nevertheless, something to keep in mind if you are looking into the company structure.

Now that we have discussed the pros and cons, let’s move on to the nitty gritty and see how the two types of companies (private and public) are different from each other. This information is all available in the blog after this one. If it’s something you are interested in understanding, keep reading!

  A company is a business structure that runs as one unit but is owned by multiple people or partners. …

Leave a Reply

Your email address will not be published. Required fields are marked *

15 + 13 =