Companies may be either public companies or private companies.
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Public companies
A public company is defined as one that has:
● allotted share capital of at least £50 000, of which at least 25 per cent has been fully paid;
● a minimum of two directors (unless it was registered before 1 November 1929), who must retire at 70;
● a qualified company secretary.
Its Memorandum must state that it is a public company, and it must be properly registered as a public company. It cannot start trading until it has been granted a Section 117 Certifi- cate by the Registrar.
The name of the company must end with the words ‘Public Limited Company’ (which may be abbreviated to plc), unless it is incorporated in Wales, for which the Welsh equiva- lents should be used.
Contrary to popular belief, a public company is not necessarily listed on the Stock Exchange, although only public companies can achieve a listing. To be listed on the Stock Exchange the company must also satisfy the Exchange’s listings requirements.
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Private companies
A private company is any company that is not a public company. It may trade from the date of its incorporation, and its name should be followed with the word Limited (Ltd), or its Welsh equivalent. Whilst all companies are required to prepare full statutory accounts for their shareholders, those for smaller companies may show less detailed information. Private companies are allowed to file limited financial information if they are classified as small, or medium sized.
3 Different types of company
Companies are legally regarded as separate from their members, therefore, starting a com- pany limits the liability of the company’s members. The commonest way that companies limit members’ liability is through the issue of shares. Each shareholder’s liability is then limited to the amount of any unpaid share capital. Liability can also be limited by guar- antee, each member guarantees a specified amount if the company is liquidated.
Most companies are started by registering them under the Companies Act. However, it is possible to form a company by a special Act of Parliament or by a Royal Charter. To register under the Act, companies must submit certain documents to the Registrar of Companies. The most important of these are the Memorandum and the Articles of Asso- ciation. The Memorandum governs the company’s relationships with the outside world and gives important details about the company. It tells us its name, where it is incorpo- rated, what it can do, the shares the company can issue and nominal values of the shares, and who owns them. The Articles are concerned with the internal management of the company. They detail the procedures that should be followed in a range of situations, including the issuing and transferring of shares, the holding of annual general meetings, the appointment of directors, and liquidating the company.
SUMMARY
A private company is defined as small or medium sized if it does not exceed more than one of the following criteria shown in Table 3.1.
Accounting and filing criteria for small private companies
A small company is only required to file a modified balance sheet. This only shows the totals for each balance sheet category. It is a less detailed balance sheet than the one that is included in the statutory accounts prepared for the shareholders, and offers more limited notes.
In addition to the filing exemptions, small companies prepare for less detailed accounts.
Until recently, the accounts prepared by small and large companies were broadly similar, although smaller private companies were exempt from some accounting standards. (For example, they do not have to prepare a cash flow statement.)
In 1992, an amendment to the Companies Act introduced substantial disclosure exemp- tions for small companies. We are currently in the process of evolving two different sets of generally accepted accounting practice. Larger companies being required to comply with all statutory provisions and accounting standard requirements. Whereas smaller private com- panies comply with a shorter set of rules that require less disclosure in the accounts.
Accounting and filing criteria for medium-sized private companies
Medium-sized companies must prepare full statutory accounts for their shareholders and there are fewer filing exemptions. Their filed accounts will comprise:
● a Director’s Report
● a balance sheet
● a modified profit and loss account (this starts at gross profit and, therefore, does not disclose turnover or cost of sales).
Advantages of a private company
The only real disadvantage of private companies is that, since the Financial Services Act of 1986 (s 170) they are effectively denied access to the capital markets. As long as you do not want this access to the capital markets, private companies offer more flexibility than public companies.
Private companies have a number of advantages over public companies, which include:
Share capital
● Subsequent share issues do not have to be in the form of a rights issue, unless the company’s Articles require it (Companies Act, s 89).
● There is no requirement for any valuations to be made if shares are issued for assets, rather than cash.
Criteria defining small and medium-sized companies Table 3.1
Criteria Small Medium sized
Turnover £2.8 m £11.2 m
Total assets £1.4 m £5.6 m
Average number of employees on a monthly basis 50 250
● There is no minimum share capital.
● Private companies may provide financial assistance for the purchase of their own shares by following the statutory procedure (Companies Act, ss 155–158).
● Private companies may purchase or redeem their own shares out of capital (Compa- nies Act, ss 170–177).
● There is no obligation to show the true ownership of a private company’s shares, no matter how substantial the shareholding (Companies Act, ss 198–211).
Loss of capital
● There is no requirement to hold an extraordinary general meeting in the event of the company having lost half, or more, of its called up share capital (i.e. the net assets are at half or less of the of the called up share capital. This is referred to as a serious loss of capital).
Provision for unrealised capital losses
● A private company need not make a provision for an unrealised capital loss before making a dividend distribution (Companies Act, s 264).
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Close companies
You will also see reference in accounts to a different type of company, a close company. This is not a term from the Companies Act, but from s 414 of the Income and Corporation Taxes Act (1988). The close company provisions were established to stop individuals avoiding per- sonal tax liabilities. A close company is one that is either an:
3 Different types of company
The main differences between public and private companies are summarised in Table 3.2.
SUMMARY
Differences between public and private companies Table 3.2
Public companies Private companies
Minimum share capital £50 000, at least a None
quarter of which must be fully paid
Minimum number of shareholders Two One
Minimum number of directors Two One
Qualified company secretary Yes No
Able to offer shares to the general public No Yes
Directors retire at 70 Yes No, unless the company
is a subsidiary of a public company
Extraordinary general meeting if Yes No
the net assets fall to half the share capital
● unlisted company – under the control of five, or fewer, people or its directors.
Most private companies will be close companies; or a
● listed company – here less than 35 per cent of the shares are held by the pub- lic. The Stock Exchange rules require listed companies to dis- close whether or not they are close companies.