Theory question 109
Business UnitsCommerce 2 (answer five questions)
(a) Explain five reasons why many small businesses turn into private limited liability companies
(b) What are the disadvantages of such a decision?
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(a) Any five, explained: limited liability – owners' private property is protected; separate legal entity – the company can sue and be sued and own property; continuity – it does not end when a member dies or leaves; more capital – up to the legal maximum number of members can contribute; easier to borrow from banks; expansion and economies of scale; shares can be transferred within the family/members, keeping control; affairs still kept fairly private (shares not offered to the public).
(b) Any four: formation is costly and involves legal formalities; must comply with Companies Act – file annual returns and audited accounts; profits shared among more owners; slower decisions; separation of ownership and control may reduce personal interest; cannot raise capital from the public; shares not freely transferable; double taxation (company tax and tax on dividends).
Contrast with the position of a sole trader or partnership.