Discussing The Limited Liability Of A Company

First, what is a company? It is a trading entity that belongs to its shareholders and the Ltd or plc after the name indicates that it has limited liability. The plc also indicates that the company is a Public Limited Company: one whose shares or other securities may be held by the investing public and traded on a market. In either case the liability of the owners is limited to the amount of money they have put into the business.

Unless they give personal guarantees for the debts of the business, the owners or shareholders (members, in the legal jargon) of a limited company cannot be called on to meet the company’s debts where these exceed its assets. Only the money put into the company can be lost. Anybody who operates a business as a sole trader or as a partner in a partnership, on the other hand, is liable for all the debts of the business.

The owners of the ordinary shares in a company normally have the power to control the company if they act together, though the directors and managers who may or may not be shareholders run the company. Usually each ordinary share carries one vote. Owners of more than 50 per cent of the votes will thus if they all vote the same way they control the company.

In practice shareholders can influence the way a company is run primarily by voting on the appointment or dismissal of directors and on certain other major policy matters that have to be presented to shareholders at a formal meeting of the company. Certain major resolutions to change the aims and objectives of a company, say will require 75 per cent voting in favor.

Most of the time shareholders vote the way the directors advise them to, especially at the annual general meeting or AGM of the company, which is normally a non contentious event where the required resolutions are duly passed. The press will generally pick up the occasions when there is dissent between different groups of shareholders or between shareholders and directors. This is where the question of voting power becomes interesting.

Ordinary shareholders are entitled to receive accounts. As a rough rule (it’s not technically quite correct) companies are required to produce a set of accounts each year. This is a legal requirement. The Stock Exchange further requires that listed companies produce figures showing profits at the half year stage (in America they produce them each quarter).

The best way to look on accounts is as a sort of shorthand for what is really going on in a company. The bare figures don’t conjure up the smoking chimneys or the salesmen out on the road. But once you are reasonably familiar with the basic figure work you can begin to look at what lies behind it.

The main items in the accounts are a profit and loss account, a cash flow statement and a balance sheet. Under recent accounting rules, the company should also include a statement of total recognized gains and losses and a note of historical cost profits and losses but we do not need to bother too much with these for the moment.

Various other bits of information required by law, by the accounting standards of the day or by the Stock Exchange in the case of a listed company are usually contained in the directors’  report or in the detailed notes to the accounts. In practice, the report and accounts of Stock Exchange traded companies normally contain a lot more information in the form of a chairman’s statement, a review of the year’s trading and statements of compliance with various codes and practices that companies are meant to observe. Lavish colour illustrations may also bulk out the document.