Company Limited by Shares
|Who controls it?||Board of Directors|
|What is the governing document?||Memorandum and Articles of Association|
|Who is the regulator?||Companies House|
|Does it have limited liability?||Yes|
|What sources of finance are available?||Loans, Equity Finance, rarely grants|
|Is charitable status available?||Very rarely|
A company limited by shares (CLS) divides its share capital into shares of fixed amounts and can then issue them to shareholders. The shareholders then become the owners of the company.
A CLS can be financed by grants, loans (secured and unsecured) and by equity.
Dividends are paid from generated surpluses and are not therefore a cost of the business, unlike interest on a loan. Shareholders are only rewarded if there are profits available for distribution, and in the lean years they get nothing. Equity therefore has the advantage of being ‘patient’ finance.
Share capital has a positive impact on a company’s balance sheet, as it is classified as an asset. This is in marked contrast to a loan, which is treated as a liability. Consequently, a company that is financed by borrowings, for example from its parent charity (if a trading company) or from supporters, will find it very difficult to borrow money from a bank since the bank will regard it as already highly ‘geared’. On the other hand, if it has a reasonable amount of paid up share capital this should give it a stronger balance sheet, providing an asset based upon which a bank can take security.
Share ownership can bring a sense of involvement, and this has been used to good effect by companies that encourage share ownership among staff, or by social enterprises issuing shares to ‘social investors’. Shares are potentially transferable, thereby allowing an investor to realise his or her investment.