A main feature of a limited company is that it has a legal identity that is separate from that of its owners. The liability of all business owners is limited. They cannot be compelled to use personal funds to settle commercial debts in the case of a company collapse. They simply suffer a loss equal to their initial investment in the business.
A company, also referred to as a corporation, is a legally distinct entity that was established by government regulations, with its assets and responsibilities. A corporation is a legal body with many of the same obligations, privileges, and powers as an individual, including the ability to acquire, possess, and transfer property.
Private vs Public Limited Company
Corporations can enter into contracts with individuals or with other legal entities, and they can sue and be sued in a court of law. As a limited company has a separate legal identity, all owners have limited liability. People become owners of a company by purchasing shares of stock. Many small companies are privately held, meaning that ownership is restricted to a small group of investors, and are called private limited companies.
The majority of large companies are publicly traded, making it simple for investors to buy or sell shares. These companies are called public limited companies. Stockholders of publicly held companies can sell their shares of stock when they need money. They are disappointed with the performance of the company, or simply expect that the stock price will not rise in the future. Their stock can be sold to some other investor who wants to invest in that company.
Publicly traded companies can raise more money by issuing new common stock. This means that either their existing stockholders can purchase more stock, or other investors can become stockholders by purchasing the company’s stock. By issuing new stock, companies may obtain whatever funds are needed to support any business expansion.
Structure of a Company/Corporation
A charter or article of incorporation is used to establish or incorporate a company. The three primary components of the organizational structure are the management, directors, and stockholders.
Owners of a corporation are known as stockholders (or shareholders), and they hold shares of stock that provide them with specific rights. They can sell or transfer their ownership in the corporation (represented by their shares of stock) at any time. They can also receive a portion of the corporation’s income in the form of dividends. By the corporation’s bylaws and charter, shareholders are permitted to participate in annual meetings, choose the board of directors, and vote on issues that impact the corporation. Typically, each share of stock has one vote.
A board of directors is elected by shareholders to manage and administer the corporation as a whole. The directors choose corporate officials, establish the organization’s principal objectives and policies, and manage both the company’s operations and finances. Small companies may only have three directors, whereas major enterprises typically have ten to fifteen. Large organizations often have both internal corporate executives and outside directors on their boards, who are chosen for their expertise both personally and professionally. Due to their independence from the corporation, outside directors frequently offer a fresh viewpoint on its operations.
Hired by the board, the executives/officers of a corporation are its top management and include the president and chief executive officer (CEO), chief financial officer (CFO), vice presidents, treasurer, and secretary, who are responsible for achieving corporate goals and policies. Officers may also be board members and stockholders.
Advantages of Limited Company
Combination of resources and economies of scale. The corporate structure enables companies to combine financial and human resources to create businesses with outstanding growth and profit potential.
Limited liability. A key advantage of companies is that they are separate legal entities that exist apart from their owners. Owners’ (stockholders’) liability for the company’s obligations is limited at the number of shares they possess. Only the corporation’s assets will be available to creditors in the event of bankruptcy.
Ease of transferring ownership. Stockholders of public companies can sell their shares at any time without affecting the status of the corporation.
Unlimited life. The life of a corporation is unlimited. Because the company is an entity separate from its owners, the death or withdrawal of an owner does not affect its existence, unlike a sole proprietorship or partnership.
Tax deductions. Companies are allowed to deduct as an expense, such as operational costs, which lowers their taxable income.
Ability to attract financing. Selling new shares of stock allows businesses to raise money. By dividing ownership into smaller pieces, more investors can afford it because they can buy one or thousands of shares. The large size and stability of companies also help them get bank financing. All these financial resources allow companies to invest in facilities and human resources beyond their scope. A sole proprietorship or partnership would not be able to produce cars, offer nationwide telecommunications, or construct chemical or oil refineries.
Disadvantages of Limited Company
Double taxation of profits. Income taxes for businesses are due on their profits. Any earnings (dividends) distributed to stockholders are also taxed as personal income, albeit at a slightly reduced rate.
Cost and complexity of formation. As outlined earlier, forming a corporation involves several steps, and costs can run into thousands of rupees, including registration, and license fees, as well as the cost of attorneys and accountants.
Increased government restrictions. Unlike sole proprietorships and partnerships, companies are subject to many regulations and reporting requirements. For example, companies must also register with the Securities and Exchange Commission of Pakistan (SECP) before selling stock to the public. Unless it is closely held (owned by a small group of stockholders), a company must publish financial reports on a regular basis and file other special reports with the SEC and other regulatory agencies. These reporting requirements can impose substantial costs, and published information on corporate operations may also give competitors an advantage.
Frequently Asked Questions
What is the difference between a company and a corporation?
Although not all companies are corporations, a corporation is usually a company. The term “company” can apply to a wide range of organizational forms, including One person managing all business operations in a sole proprietorship, which is how it is defined.
What is the corporation?
A corporation, also known as a “corp” is a legal entity that exists independently of its owners. Corporations can generate revenue, pay taxes, and face legal consequences. The strongest protection against personal liability is provided to owners by corporations, although forming a corporation is more expensive than creating other types of entities.
What is a Limited Company?
A limited company (LC), sometimes known as a limited liability company, is a type of business structure in which the owners’ assets and revenue are separate from the company’s assets and income.
What is an example of a corporation?
Corporations are the majority of large companies, like Microsoft Corp. and Coca-Cola Co. Some businesses operate both under their names and different trade identities, such as Alphabet Inc., which operates as Google.