A company is a legal entity that is formed by an association as well as a group of people. A company is basically formed for working together to achieve a common objective (Company 2022). A company can either be an industrial enterprise or it can be a commercial enterprise. According to the British definition, a company is an incorporated business organization or body corporate and it is registered under companies act. It can be a private or public company, a company limited by guarantee or having a share capital, or a limited or unlimited company.
Key features of the company are discussed below:
Separate legal entity: Legal entity denotes that it is completely independent of its people who are controlling its operations that is the company will not be responsible if debts are not paid by the members. Hence, the same is applied to the company if it is unable to pay creditors then members do not have to pay for the company’s debt (Features of company 2022).
Artificial person: As the company has its name and bank accounts so by law it is treated as a legal artificial person. A company can perform all activities that are done by a person legally that is it can file a lawsuit against other companies or persons, or it can own property under its name. Hence, a company acts as an artificial individual.
Limited liability: The shareholder’s liability is only limited to their share price that is by share it is limited in the companies whereas in limited companies by guarantee in which shares of contributions is an asset in company if it goes bankrupt then a small amount is paid up by the shareholders for covering the losses of the company.
Incorporated association: Business operations of the company is started during the time it is registered under the companies act and registered by the law. The company’s registration process is very big and it involves a memorandum of association, price of shares and shareholders, a name, board of directors, office, address, phone number, and other legal documents.
Perpetual existence: A company does not depend on owners, shareholders, employees, or the board of directors as many people come and go in it but the company stays like that. Hence, the existence of the company is very stable.
Common seal: As discussed above that a company is artificial legal person so it has a stamp or seal containing its name and address. This stamp or seal is the signature of the company and it is basically sued for the process of verification and authorization of different documents.
A public company is defined as the company which advertises its stock and shares to the general public. Share of a public company can be traded by people freely without any restriction. In the stock exchange market, the shares of listed companies are traded. In England, a public company should have two shareholders and two directors only then it would be considered as a public company. Certain companies are private at the start but after fulfilling all the legal requirements they become a public company. There are certain advantages and disadvantages of forming a public company. They are discussed below:
Raising capital by public issue of shares: The first and foremost advantage of forming a public company is that it has ability to raise shares especially when the company is listed on a recognized exchange. Capital raised in a public company is much larger as compared to a private company as it can sell shares to the public and any people can also invest their money. Stock listed on a recognized exchange can attract investment from mutual funds, hedged funds, etc (Bajpayee and Bajpayee 2020).
Increasing shareholders base and spreading risk: The risk of company ownership among a large number of shareholders is spread when shares are offered to the public. This allows early investors in the company to sell their shares at a profit while retaining a stake in the company. Therefore, obtaining capital from more investors has some benefits than depending on one or two angel investors.
Transferability of shares: Public company’s shares are easily transferred as compared to private equivalent which means shareholders benefit from liquidity. It is easier for shareholders and potential shareholders to transfer shares in company if shares are quoted on the stock exchange (Korchak 2016).
Red Tapism and Nepotism: People have to stand in long queues as a public limited company as too many legal formalities are needed in a public company. Too many legal formalities also result in a delay in every decision of the public company. As the public is involved, broad negatives of public sector undertakings come into play.
Control and regulations: A large no. of acts, rules, and regulations governs the public limited company. Hence, as the external degree of control is higher it means lesser autonomy lies in the hands of directors.
Inflexibility: Rigidity in decision making to the company is imparted as decisions are delayed in the public limited company.
Distribution of profits: As profits are distributed among no. of shareholders so per head profit is reduced as the company will be left with fewer profits.
Suitability: Public company is not suitable for all types of businesses and it is best suited for large-scale business as it caters to the needs of various sections of society and it not suited for small-scale business (Public Limited Company 2022).
High costs: Public companies require huge costs, time, and effort. Profits in a public company are high if the investment is higher.
Cash is considered as the life of the business and it is very important for a business to generate cash from activities so as to meet its expenses and pay its investors and also grow the business. With the help of cash real health of a business can be ascertained easily. Cash is needed for survival and for expanding the business (Morar 2015). In addition, cash from activities is also needed by the business for managing cash situations so that the business holds cash for meeting long-term needs as well as immediate needs. Cash is considered a king for businesses as it helps in meeting everyday needs and also helps in avoiding debt. Businesses will find it difficult to pay suppliers, employees, if it has, does not have sufficient cash (Kerstis 2018). Cash is also required for paying a dividend and making investors happy and also for engaging in share buyback for rewarding investors. Cash is important for business due to following reasons:
Corporate governance is a system that includes rules, regulations, and principles that are used for governing the companies. Corporate governance ensures that each people in the organisation follows transparent decision making and appropriate processes and interests of shareholders are protected (Bhagat and Bolton 2019). The main purpose of corporate governance is to build trust, accountability, and transparency so that long-term investment, the integrity of the business, and financial stability can be fostered which in turn will lead to stronger growth and inclusive societies. The role of owners of a company is much different from the managers when effective decision-making is done. Importance of corporate governance is growing due to the effect of globalization as it ensures transparency which in turn ensures the safety of shareholders.
Principles of good corporate governance are discussed below:
Discipline: It is a commitment given by senior management of company for adhering the behaviour that is recognised universally and accepted to be proper and correct. This encompasses awareness of company, commitment to underlying principles of corporate governance at senior management level. Hence, all the parties that are involved will have to follow procedure, processes and structures established by organisation.
Transparency: Transparency indicates how easily an outsider is able to make meaningful analysing of actions of company and non-financial aspects pertinent to business. Transparency helps in measuring how good management is making important information accurately and timely. It also indicates whether true picture of what is happening inside the company is obtained by investors or not.
Independence: Independence denotes the mechanism that has been put in place for minimizing and for avoiding potential conflicts of interest like large share owner. Hence, the main objective should be to make a decision and to establish internal processes and any to avoid undue influences. For minimising and avoiding conflict of interest all processes and decision-making used should be established.
Accountability: When decisions are made and actions are taken on any specific issues in a company by any individual or group, they are accountable for their actions as well as decisions. Hence, the mechanism should exist and it should be effective for accountability.
Responsibility: Responsibility pertains to behaviour with regard to management which in turn allows to correct actions and to penalize mismanagement. Responsible management does everything that is required for setting the company on the right path. As board is accountable to company hence it their duty to act responsively towards all stakeholders of company. It is the responsibility of each contracted party to act responsibly to its stakeholders as well as to the organisation (Mallin 2016).
Fairness: It is very necessary to balance the system that exists in the company by considering all those who have interest in company and its future. Hence, rights of different groups should be respected and it should also be acknowledged. Example: interest of minority shareholder should be considered equally with those of dominant shareholders. Therefore, any unfair advantage to any party is not allowed if all the decision are taken correctly, correct processes are used and implemented.
Social responsibility: A company that is managed well will give their focus on social issues by placing ethical standards of high priority. A good corporate citizen is non-discriminatory and it is also responsible with environmental and human right issues. Indirect economic benefits are also experienced by the company like improvement in productivity (Tricker and Tricker 2015).
Gearing is considered as a ratio that indicates the debt to equity of the company. It is used for determining the extent to which the operations of the company are funded by lenders in comparison with the shareholders (Sudharto and Salim 2021). The financial leverage of a company is measured by using gearing. A company is said to be highly leveraged when the equity to debt ratio of the company is high. Gearing is determined by using various ratios such as debt coverage ratio, debt-equity ratio, shareholders equity ratio, etc. All these ratios help in ascertaining the risk involved in the business (Kariyawasam 2019). The ideal gearing varies based on the sector as well as the degree of leverage of peers. There are various advantages and disadvantages of gearing. They are discussed below:
Banks are interested in the gearing of the company for determining the creditworthiness of companies. Gearing is needed by banks for taking decisions whether to extend credit or not. Banks always prefer high gearing as they borrow capital for lending is to customers. Gearing helps the banks in determining whether the borrower has the ability to repay loans or not. Hence, for making important decisions banks are interested in company’s gearing.
Reference
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