Companies limited by shares account for most private companies registered in our country. This company structure is particularly popular as the company exists as a separate legal entity from the individual owner.
Company limited by shares: The concept
According to Section 2(22) of the Businesses Act of 2013, such businesses are those whose members’ liability is restricted by the amount owed on each member’s shareholding amount.
The business can take care of this responsibility when the entity is operating and about to shut down. The phrase “limited by shares” describes the shareholders’ obligation to reimburse the company’s creditors for the initial investment.
According to the Companies Act of 2013, a payment due on shares that members of the firm own limits their liability. An organization of this kind is a company limited by shares.
No actual asset may be used to satisfy the debt; the shareholders must pay off the company’s debts only to the amount they are still owed on their shares. The share capital of such a firm shall be divided into fixed shares of an amount that may be distributed to shareholders. This share distribution enables people to take ownership of the business.
Loans, equity, and grants are all viable funding sources for a corporation limited by shares.
The two main types of companies limited by shares are broadly classified as follows:
- Limited company by guarantee: Such a firm does not have the concept of shares. By guarantee, members of the limited company pay modest contributions to cover the outstanding debt in the event of liquidation.
- Public limited company: These businesses frequently have stock market listings. A public limited company shareholder’s obligation is only as great as their shareholding.
Key facts about the company limited by shares
- Shares limit the company’s ownership and include members of the public domain. Any individual in the public domain can acquire a share in the company by purchasing it via the stock exchange.
- The nominal value of the shares in question is the maximum amount for which corporation shareholders are liable.
- Shareholders aren’t required to deal with losses that typically surpass the shares’ nominal worth. The Ministry of Corporate Affairs (MCA) and other national regulators oversee corporations limited by shares in each country.
- To maintain compliance, businesses must also send regular reports to the relevant government agencies and departments.
- The reports must include financial statements, a statement from the BODs, and an auditor’s report.
- A corporation limited by shares can operate as a public limited company or sell shares to the general public to raise money for its operational needs.
- These businesses have the negotiating power to obtain money from mutual funds, institutional investors, and portfolio firms. (Note: A portfolio entity is an organization that a fund of funds (FoF) invests indirectly.)
- As a result, the business can secure enough capital to achieve many goals, including expansion and capacity building.
- The business can pay off ongoing liabilities in the form of debts, restructure debts, conduct R&D, and buy out small or competing businesses.
- A corporation limited by shares must hold the shareholders’ annual general meeting (AGM).
- The corporation should present them with important financial records and other pertinent information to get shareholders’ approval.
- The corporation is responsible for passing resolutions that carry out the meeting’s agenda.
What are the shares’ nominal values?
The face value that a corporation allocates to a share at the time of its issue is the nominal value of a share. The following equation can be used to determine a share’s nominal value:
The nominal value of a share = Paid-up share capital/ number of shares outstanding to date
The share that remains around a particular value assigned by the corporation during the issue of a share is referred to as having a nominal value or nominal value in plain terms. It might be interpreted as a share’s exact or minimal valuation. Simply explained, the nominal value is an investor’s whole cost when purchasing a single share.
It is important to note that regardless of changes in the market, the value of these shares remains constant. The same cannot be true for a stock split, though.
In the statement above, “paid-up share capital” refers to the sum of money that has been exchanged for corporation shares.
On the other hand, the total number of shares outstanding refers to the total number of shares issued to shareholders as of the specified date.
Benefits of companies limited by shares
- Limited financial obligation—Shareholders are only liable for the company’s debts according to the nominal value of their shares, protecting their finances.
- Your professional reputation and commercial profile will be significantly enhanced by incorporation. Because they provide the image of a well-run, respected company that is well-organized and established, limited firms are frequently more alluring to potential customers and investors.
- If you need to raise money or expand your enterprise, you can sell shares of your firm at any time.
- A limited company may have another corporation as a shareholder or director. However, at least one natural (human) director must always be. Please note that a law banning corporate directors was just approved and is currently being enacted.
- A limited company’s ownership may be transferred.
- Once you register a company name, it becomes protected. It cannot be used by another limited liability company (LLC) or registered under another company’s name that is the same or too close to yours.
Before we conclude, let’s address a few crucial concerns regarding a business limited by shares.
How many people are required to form a limited company by shares?
This kind of business can only be registered and operated by one individual. At least one shareholder and director are required, but the same person can hold them.
What does it mean to be a limited-by-shares company?
A business limited by shares is required by law to convene an annual general meeting of its shareholders. The business should present the shareholders with the financials and relevant data for approval. The business community should adopt resolutions during meetings to approve the topics on the agenda.
A business limited by shares has two options for raising capital: becoming a public limited company or selling shares to the general public. Portfolio companies, mutual funds, and institutional investors can all provide cash to a publicly traded firm. As a result, the corporation has a lot of revenue to use for capacity and business growth. The business can pay off or restructure debt, conduct research and development, and acquire smaller or competing corporations.
Conclusion
To maintain transparency, a corporation limited by shares should include pertinent disclosures about major developments in its filings with the stock exchange and any interested shareholders. Not all exchanges require listing. However, a business may decide to list to provide its stockholders with liquidity and better access to the capital market.
