Suggested answers to review
questions
1.1 Reasons for the popularity of the limited company include the following:
l Number of participants.The partnership, which is the only feasible alternative, is
restricted to less than 20 participants in most cases. This limits the business that
wishes to involve large numbers of participants providing equity finance to oper-
ating as a limited company.
l Limited liability.Potential equity investors are more likely to be prepared to invest
where the liability for losses is limited. Thus limited companies are able to attract
equity finance more easily than partnerships.
l Perpetuity.Limited companies continue to exist despite changes in their owner-
ship. Thus if a shareholder transfers his or her shares, the company is strictly
unaffected. When a partner leaves a partnership, the partnership comes to an
end.
l Transferability.Linked to the previous point is the fact that shares can easily be
transferred from one person to another. This means that one shareholder can sell
shares to another, perhaps through the Stock Exchange.
l Credibility.Since most substantial businesses operate as limited companies, not to
do so may imply some lack of substance or permanence about the business. This
is not to say that operating as a limited company guarantees reliability, but this
may, to some extent, accord with public perceptions.1.2 In essence there is no difference between the position of a limited company and a
human person in respect of its financial obligations to others. Both are fully liable to
the extent to which they have assets to meet the obligation. In both cases, under nor-
mal circumstances the assets of third parties cannot be required to meet any short-
fall between the obligation and the assets. Thus shareholders in limited companies
cannot normally be asked to contribute assets to meet unsatisfied financial obliga-
tions of the company in which they own shares.1.3 The position of the shareholders is that, so long as they have provided any funds
that they have pledged to pay into the company, they cannot normally be required
to make payments to cover any failure of the company to meet its financial obligations.
The owner of a sole proprietorship business (a sole trader) can be required to
meet all of the debts of the business using what may be regarded as personal assets
(for example, the sole trader’s house) if necessary.
Thus owners/part-owners of different types of business find themselves in very
different positions regarding the extent to which they risk their personal assets as a
result of their participation in the business.Appendix 3
Chapter 1
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