Chapter 16 • Small businesses
16.3 Organisation of small businesses
Typically, the small businesses that we are considering here will be organised as priv-
ate limited companies. In essence these are identical to their public counterparts. The
main differences are as follows:l Private companies need be of no minimum size; public companies must issue at
least £50,000 of nominal share capital, of which at least 25 per cent must be paid up.
(However, as with public companies, there is no upper limit on the size of private
companies.)
l Private companies are entitled to restrict the transfer of their shares, that is, it is
possible for the company’s Articles of Association to contain a clause giving the
directors the power to refuse to register a transfer, at their discretion.
l Although private companies must publish annual financial statements, the volume
of detail is rather less than that which the law requires of public companies.
l Private companies must generally include the word ‘limited’ or its abbreviation
‘Ltd’ in their names; public limited companies must include ‘plc’ in theirs.Probably, in practice, the only one of these distinctions that is of any great
significance is the second, concerning the restriction on transfer of shares. To the small
business, the effect of the right of restriction can be something of a two-edged sword.l On the one hand, it enables the majority of the shareholders to stop the minority, be
it one or more shareholders, from transferring their shares to a third party unac-
ceptable to the majority. In this way control, and even just influence through voting
power, may be kept in the hands of those acceptable to the majority. In a family-
type business it may be important to the shareholders that ownership remains in
the same hands, not necessarily for financial reasons.
l On the other hand, potential equity investors would be reluctant to buy shares in a
business that effectively had the power to stop them selling those shares when they
wished to. Not unnaturally, most established secondary capital markets, certainly
the London Stock Exchange, will not allow dealings in shares where there is a
restriction on transfer. For small businesses eager to expand, being a private limited
company may be an impediment to growth.It is not necessarily true that all small businesses will be private limited companies,
but given the attractions of the lesser requirement to account publicly and the ability
to control their membership through share transfer restrictions, many of them are.
Of the total of about 2.1 million UK limited companies, about 99.5 per cent are priv-
ate and only 0.5 per cent public.16.4 Taxation of small businesses
As far as tax on corporate profits is concerned, the only likely difference between large
and small businesses is the corporation tax rate. The current rates are set out in Table 16.1.
Note that ‘large’ and ‘small’ for tax purposes are defined entirely in terms of profit,
and so individual businesses can, and do, move from being large to being small from
one year to the next as their profits fluctuate.