Types of Business

Sole Trader Partnership Limited Company

Sole Trader & Partnership

The liability of the owner is Unlimited. Partners are jointly & severally liable for the debts of other partners. This protects suppliers. Hard to raise more finance. Easier to set up than companies.

Limited Liability The maximum loss of the shareholder is the money they have paid for the shares. Much easier to raise finance. Control will be diluted if shares are issued to outsiders. Small companies may find it harder to obtain credit from suppliers. Must provide Reports to Companies House www.companieshouse.co.uk

Companies

Companies
Private Limited Company (Limited or Ltd) Shares are not issued to the public. The majority of companies.
Public Limited Companies (plc) Bigger companies; shares are traded on the Stock Market.

Ownership & Control

The owners appoint the Directors to run the business for them. The Directors report back to the owners at the Annual General Meeting (AGM). The Directors prepare the financial statements, using Accounting Standards.

 The Auditors check the financial statements and report to the owners at the AGM. The owners may reappoint the directors & auditors at the AGM. The owners decide on any dividends.

Share Capital Equity or Ordinary shares

These shares have voting rights (control) Dividends may be paid if there is sufficient cash spare after allowing for future requirements. The owners hope for dividends and share price increases. Dividends are not compulsory. There is no minimum or maximum level of dividends.

Preference Shares
These shares do not have voting rights. If a dividend is paid, these shares may receive a fixed level of dividends (%). They will be paid before any dividends to ordinary shareholders.
This reduced risk was the reason why the UK government took Preference shares in UK banks (October 2008 onwards).

How to raise finance: a) Share Issue

1) Existing shareholders must be offered the right to buy any new shares. 2) The proportion will be in line with their existing shareholding. 3) They can buy the new shares, or sell the right to someone else. 4) Only if they do nothing will they lose out. 5) It is more expensive to make a public share issue.

b) Borrowing (long term)

A company may issue a Debenture (the certificate that evidences a loan issue). A company must pay Interest on its borrowings, normally at a fixed annual rate, to the debenture holder. The loans conditions are shown in a contract. Debenture holders will not have votes. The debenture may be sold to another lender.

Chapter 5 - CASH
We will keep simple Cash records, which we can use for Cash forecasting to the future. Chapter 5 provides a detailed analysis of cash movements in the past. We will not work through chapter 5

Cash Forecasting
Balance brought forward + Cash inflows - Cash outflows = Balance carried forward x x (x) x

Balance b/fwd + Cash inflows - Cash outflows = Balance c/fwd

Jan Feb Mar x x (x) x

Profit versus Cash

Profit and Cash are not the same! You can be profitable but have no Cash (see banks in October 2008). Do not muddle them up. Learn the formats.

Next class session:

I will run through: TT Ltd (pages 103-4) TT Ltd (pages 109-110) Please attempt these questions before class.