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Company finances and new issues (Capital structure (Gearing: The use of a…
Company finances and new issues
Company structures
In the UK, a company cannot operate in any form unless it has been incorporated and registered as a company at Companies House
When companies have been registered at Companies House, a certificate of incorporation will issued
The four main types of UK company structures are
Private unlimited companies
One that may or may not have share capital
No limit to its members' liability
Disclosure requirements will be less rigid than for other types of company
Cannot offer their share capital to the general public nor be quoted on recognised stock exchanges
Private companies limited by guarantee
A company that does not have any share capital
Its members are guarantors rather than shareholders
Limited by guarantee when its members agree to guarantee a specific amount of their own assets to the company in the event of the company being wound up
Cannot be quoted on recognised stock exchanges
Do not have to have limited or Ltd after their name, provided they have been granted an exemption
Private companies limited by shares
Do have share capital
Shareholders liability is limited to the amount of the fully paid share
The shareholders do not have to contribute any additional capital should the company go into liquidation
There may be instances in which the share capital is only partly paid, and in such circumstances the shareholders would have to contribute any shortfall as though the shares were fully paid
Cannot offer their shares tot he general public nor quoted on recognised stock exchanges
Their shares may be transferred with the permission of the company directors, however these are not freely transferable like shares in quoted public limited companies
Shares may be obtained from both the company and existing shareholders
In order to transfer shares, it is necessary to complete a stock transfer form, coupled with the share certificate with stamp duty having to be paid
The name must end with limited or Ltd
Public limited companies
Those that do have share capital and shareholders liability is limited to any amount outstanding for their shares
Shareholders do not have to pay any outstanding debts of the company
Can offer their shares to the general public and can be quoted on a recognised stock exchange
Can remain unquoted plcs
If a company decides to become a plc, it must fulfil strigntn requirements
Must have two directors who can also be members of the company. One director must be a person rather than another company
Must be a company secretary who is suitably qualified
Must obtain a trading certificate before conducting any business or exercising any borrowing powers to confirm it has satisfied the minimum allotted share capital requirement which is £50,000
Must have the suffix plc or public limited company
25% of its share capital must be fully paid up
Hybrid Companies
A cross between a company with a share capital and a company limited by guarantee
Evolved from UK company law and are found mainly in offshore jurisdictions, such as Isle of Man, Gibraltar and the BVI
Three parties to a hybrid company
Shareholders
Own the legal title to the shares and so control a company as they possess all of the voting rights
Will not receive any dividend payments or return of capital when the company is wound up
Perform duties similar to those of the trustees of a trust
Control the company without owning the equitable rights to the shares, although the shares will be registered in their name
Guarantors
Will receive all the benefits relating to capital and income distributions
Agree to contribute a fixed nominal amount towards the company's debts (if any) in the event that the company is wound up.
Acquire a contingent liability
Invited and elected by the directors and it is their membership fees that inject money into the hybrid company
Membership fees will be calculated so that they are equal to the amount of the investment required
Distributions and rights upon liquidation belong to the guarantors
Receive the benefits in a similar manner to the beneficiaries of a trusts and they are able to transfer their rights to third parties
Directors
The rights and responsibilities of each class of member will be stated in the articles of association which will cover the scope of the directors power
Make income distributions however it is not the shareholders who will benefit but the guarantors
Income payments will be made at the discretion of the directors
Uses
As an alternative to trusts - they may be used by residents of civil law jurisdictions where trusts may not be recognised
In a similar manner to trusts and are located mainly in offshore jurisdictions
As tax planning vehicles because they do not have to be included as part of an estates declaration to HMRC, as there are no assets
For the deferral of capital gains tax
To lessen personal or company taxation
To guarantee members' interests after their death using various provisions
If one guarantee member dies, the benefits can be transferred to another member, thus avoiding the payment of inheritance tax. Legally there are no succession issues. Each hybrid company, however, will be tailored to the requirements of the investor, subject to the restrictions of the jurisdiction.
Capital structure
In a constant state of flux
The manner in which a company is financed
Combination of cash, debt capital and equity capital
The method by which a company obtains various forms of finance in order to allow it to function and to attain its corporate aims and objectives
Debt Capital
The percentage of debt contained within a company's capital structure. This may include debentures and long term bank borrowings
The extent to which a company depends upon various forms of debt in order to finance its assets
It is a reliance or part reliance on borrowed money
The greater the proportion of debt capital to overall capital, the more leveraged the company is and the more highly geared it is said to be
It must be paid back at predetermined dates and regular payments of interest may be serviced
If interest rates are high, this may have a catastrophic effect on the company's cash flow and ability to pay
If interest rates are low, this may represent a relatively cheap form of external finance; it is cheaper than dividend payments
May include any or all of
Bank borrowing in the form of fixed term loans, revolving credit lines or overdraws
Corporate bonds and commercial paper
Debentures
Equity Capital
The percentage of company's capital structure that is financed by share capital. This would include both ordinary and preference shares
Includes ordinary shares and preference shares
Private companies limited by guarantee will not have shares in their capital structures
Not all companies will be able to issue corporate bonds, dabeetures or commercial paper as they might be small companies and lenders may be unwilling to provide finance by any of these methods
The capital structure for a large quoted plc will be very different to that of a small private limited company
A company may have a need to expand or to finance major capital projects and thus may be forced into issuing shares if its directors are unable to obtain bank finance or issue bonds
Gearing: The use of a resource, often borrow funds or debt, in a way that the potential positive or negative outcome is enhanced. The objective is to increase a return substantially
Debt interest repayments and preference share dividends must be paid before any payment can be made to the ordinary shareholders
These prior claims will weaken the balance sheet because they represent increased liabilities
Debt capital and preference shares represent prior claims on a company
If the level of debt capital is too high, it may destabilise the company and even force it into involuntary liquidation
It is normal for companies to have some element of gearing but the level should be closely monitored not only by its directors, but also by corporate analaysts
Total long term borrowings / Ordinary shareholders' funds
The components of the long term borrowing figure would include long term loans and preference shares
The ordinary shareholders' funds would include ordinary shares and reserves
The aim of the gearing ratio is show investors and analysts the relationship of total net borrowings against ordinary shareholders fund