Development of organisations and reasons to become a shareholder
Many businesses have humble beginnings; their founder had a business idea that worked. There are many ‘rags to riches’ stories of individuals who began with a market stall or corner shop and who are now multi-millionaires. The road to success can be long, requiring relentless hard work and some luck to overcome pitfalls along the way.
A business owner may start as a sole trader. They are responsible for accounting records, which are required for tax and VAT purposes. This type of business is not without risks as the owner has unlimited liability and may lose all his/her personal assets if the business should fail with debts outstanding. Funding may become a pressing problem as the business grows and the sole trader needs, say, to buy new equipment or to move to larger premises.
In this case, a sole trader may then decide to become a private limited company, which has the right to raise additional money through a private share issue. As a company, there are legal requirements e.g. filing annual accounts at Companies House and completing an annual return. There is peace of mind knowing that with limited liability, the owner will not be personally liable for any debts incurred if the business runs into difficulties. Alternatively, a sole trader can borrow money to finance growth. This might mean that the sole trader has to offer a personal asset, such as his/her house, as security for the loan.
Growth may be through:
- developing new products or services
- buying the latest technology to improve products or the services
- moving to larger premises
- opening operations overseas
- acquiring another business.
A growing business needs capital, this might be raised through:
- issue of new shares (known as a ‘new issue’)
- retained profit
- bank loan
- hire purchase
- sale and leaseback.