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Companies and financial accounting
Companies and financial accounting

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1.3 Companies limited by shares

Companies limited by shares have at least the following two characteristics: they have a separate legal personality and their shareholders have limited liability. Here you will take a brief look at these two characteristics.

Companies are incorporated businesses. This means that a company is a business which has a legal personality that is separate from the legal personalities of its owners. Company law sets out formal incorporation requirements that can take considerable time to comply with.

Implications of having a separate legal personality include:

  • Companies can enter into contracts, or sue and be sued in their own right.
  • Once incorporated, the company will continue until it is formally wound up.
  • The assets of the company are protected against the personal creditors of the shareholders.

Limited liability refers to the liability of the shareholders for the debts, torts and crimes of the company being limited to the amount they paid for the shares, or the money they owe on the shares if they have not yet been fully paid up.

Activity 1 Advantages and disadvantages of sole traders and companies

Timing: Allow about 10 minutes

The purpose of this activity is to compare the main characteristics of a sole trader or a company, and to identify some advantages and disadvantages associated with each.

Write three advantages and three disadvantages of organising a business as a sole trader and three advantages and three disadvantages of organising a business as a company.

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Table 1 Comparing sole traders and companies
Advantages Disadvantages
Sole trader A sole trader is simple to set up A sole trader has unlimited liability for the debts and torts of the business
A sole trader is entitled to all the profits of the business (subject to paying VAT and personal income tax) A sole trader has complete responsibility for the business and, unless they have employees who keep the business open, will not be paid when closed due to illness, holiday and so on
A sole trader is responsible to the customers, suppliers, the government and has autonomy in running the business When the sole trader stops or dies, the business is also very likely to end
Company limited by shares Legal personality means that a company will continue until it is formally wound up Setting up a company requires a formal procedure
Legal personality means that a company can contract, sue or be sued in its own right A company has more administrative requirements than other types of business entity
Members/shareholders have limited liability Shareholders do not have the automatic right to participate in the management of the company
It is easier to raise financing for a company than for a sole trader Companies are subject to regulation under company law