BUSINESS FORMS. SOLE TRADER;- Most common business form, ie;- shopkeepers, tradesmen, farmers, etc.

No distinction between owner and the business, ie;- Liability for all the debts incurred. - Business ends upon death, retirement, etc. - Profits taxed at owners marginal income tax rate. PARTNERSHIPS;- An association of 2 to 20 people, (does not apply to accountants, stockbrokers and solicitors since 1967 Companies Act). - All partners are liable for any/all of any debt incurred. - Can carry out any business the partners wish. - All partners have a say in the running of the business. - Partnership terminates when a partner leaves, retires, dies, etc. - Profits taxed at the personal income tax rate of the recipient partner. TYPES OF COMPANY;- 1948 Companies Act defines three types of company which can be registered;1) Unlimited Company - extremely rare - usually set up to manage family estates. 2) Limited By Guarantee - members liability limited to a certain specified sum (nominally 1), usually non-profit organisations like charities, building societies, etc. 3) Limited By Shares - members liability limited to the purchase of shares in the company, ie- Limited Liability Company. THE LIMITED LIABILITY COMPANY;- The company is a separate legal entity in its own right and the liability of its members (shareholders) is limited to the money put into the company upon the purchase of the companys shares. The company has perpetual succession, ie;- the company continues even if a member dies whoever owns the shares automatically becomes the new member. Must be registered with the Registrar of companies by filing the two main documents;1) Memorandum of Association - giving the name of the company, its registered office, objectives of the company, etc. 2) Articles of associations - giving the voting rights of the members, maximum share capital, appointment and tenure of directors, procedure of meetings, annual accounts, etc. and how these can be altered by a special resolution at a meeting of the shareholders.

Two types of limited liability company;1) Private Limited Company (Ltd) - 2 to 50 members (shareholders);shares not freely bought and sold restrictions on who can own shares, (typically small and medium size family business John Smith & Sons Ltd.) 2) Public Limited Company (Plc) - minimum of 7 members (shareholders), no upper limit;- shares freely bought and sold via the stock exchange no restrictions on who can own the shares, (typically large Public Corporations quoted on stock exchange).

The Raising of Long-Term Funds. Shareholders (members) Creditors

Share capital

Debentures (loan) capital

Ordinary Shares
Deferred Preferred

Preference Shares
Cumulative Participating NonParticipating Secured Floating

NonVoting

Voting Irredeemable Redeemable Irredeemable Redeemable

Shareholders own the company, therefore any profit (whenever made) belongs to them, whether paid to them in the form of a dividend or retained within the company in the form of retained earnings.

Ordinary Shares the highest risk takers therefore usually receive the highest dividend. However their claim on the company is the last one, after all the other claims have been met. Can be split into Ordinary Preferred and Ordinary Deferred. Ordinary Preferred usually receive a smaller dividend paid out before the Ordinary Deferred, and also have any claim upon the company met first. All Ordinary Shares can have voting or non-voting rights. Preference Shares - usually give a smaller percentage dividend than Ordinary shares, but must be paid in full before the Ordinary shares get any dividend. Preference shareholders also have any claim upon the company met first, after the creditors but before the Ordinary shareholders. - Cumulative - if in a bad year(s) the dividend is not paid, it will accumulate and must be paid in full before the Ordinary shareholders can receive any dividend. - Participating - in good years some Preference shares have the right to participate in the profits to a further limited extent. - Redeemable - issued for a fixed period of time and the nominal value of the Preference share is repaid to the holder at the future redemption date. Loan Stock (Debenture) - a document issued by a company containing an acknowledgement of indebtedness. Holders are creditors of the company and the interest must be paid in full before Corporation Tax and dividend payments. Loan Stock usually carries a floating charge upon the general assets of the company, but a Debenture will have a secured charge upon a specific asset of the company (typically freehold land and property). - Redeemable - the company must repay the principle of the loan at some future specified date.

THE STOCK EXCHANGE. The Stock Exchange initially developed in response to the growth of permanent Government funding (Government Loan Stock). This was added to by large companies issuing their own Loan Stock. Hence the Stock Exchange specialised in purchasing and trading in Loan Stock. With the advent of the Limited Liability Company, and the resultant issuing of shares, the Stock exchange was the obvious place for the issuing and trading of shares. Since the deregulation of the Stock Exchange (the Big Bang of October 1986), the securities traded on the Stock Exchange use the Stock Exchange Automated Quotations (SEAQ) System, which identifies the time, price and quantities of shares involved in each deal. SEAQ securities are divided into four categories;Alpha securities - the leading heavily traded securities typically FT 100 dealings immediately shown. Beta securities - slightly less well traded securities details of dealings not immediately shown. Gamma securities - even less frequently traded screen prices are indications only, not firm quotations. Delta securities - relatively little trading takes place no price quotations given but an indication of broker/dealers who are prepared to trade in them. Methods of Issue;1) Offer for Sale the company sells its shares to an issuing house, who in turn advertises a prospectus and resells the shares to the public via the Stock Exchange. 2) Public Issue the company directly offers the public the right to subscribe for shares at a fixed price. An Issuing House usually act as an agent to set the price and advertise the prospectus. 3) Placing - the company offers shares privately to the clients of an Issuing House. These shares are not intended for sale to the general public. However, in the case of a public placing at least 25% of

shares must be made available to the public with the remainder being placed privately. 4) Tender - the company (through an Issuing House), offers shares to the general public, who are invited to bid for the shares (price and quantity). The price is therefore set by the public, ie.- the price which will clear the issue totally (the strike rate), provided the price is above any reserve price. Price xs Reserve Price D 0 yms Quantity D

5) Rights Issue - the company will offer a new issue of shares for sale to its existing shareholders only. This enables the existing shareholders to maintain their existing ownership of the company. The existing shareholders can take up their Right to buy the new issue or can sell their Right to buy to a third party. 6) Scrip Dividend - the company may wish to pay a dividend, but due to cash flow problems, may make a scrip dividend instead. The value of the dividend will be paid out in the form of new shares. The shareholder can retain the additional shares or alternatively realise the dividend cash value by selling the additional shares. 7) Scrip Issue - the company can pay a Bonus Issue to existing shareholders by issuing additional shares, paid out of the Companys Capital Reserves, (retained earnings from previous years profits not distributed to shareholders). 8) Stock Splits - the company can issue new shares with a reduced par (nominal) value to existing shareholders to replace their existing shares, thereby making the new shares more easily marketable. 9) Venture Capital - Equity Capital which is considered to be of a high risk nature.

DEBT FINANCE. The distinguishing features of debt finance are;1) Investor - less risky than equity finance, ie.- interest paid out before dividends. 2) Company - less expensive than equity finance, ie;a) less risk for investor, therefore lower expected returns. b) interest is a legitimate business expense, hence its taxdeductable, ie.- interest is deducted from net profit before the profit before tax is declared. Debt finance is usually split into three categories;1) Short term - this is for short term cash flow problems - so this is for periods of up to one year, 2) Medium term this is for medium size purchases, typically machine tools, company vehicles, plant and equipment, etc - so is for periods of one to ten years. 3) Long term this is for major expansions of the company, acquisitions of other companies, etc - so is for periods of ten years or more.

1) SHORT-TERM DEBT (<1year);- sources usually banks, but also discount houses, accepting houses, etc. Bank Overdrafts - used to smooth out cash flows. - cheap if kept to short term. - can be recalled without notice. (NOTE;- should never be used to purchase fixed assets).

Trade Credit - most commercial business conducted on credit. - necessary for most sales. - no interest charged, but giving credit means loss of opportunity to earn interest. Bills of Exchange - seller draws up a bill of exchange in which the buyer agrees to pay a set amount at a future date, (usually 30/90 days hence). Depending upon the credit rating of the buying company, the bill of exchange can be discounted, (by a discount house), to give immediate cash. Acceptance Credits - similar to a bill of exchange but drawn upon a bank, (not the customer). A promise to pay by a bank carries more weight than a commercial company, ie.- less risk, hence, a lower discount rate. Factoring - usually three levels of service;1) sales ledger accounting, invoice dispatching, etc. 2) credit management, bad debt insurance, etc. 3) advancing clients up to 80% of the value of any invoices they are collecting. Invoice Discounting & Credit Insurance - advance up to 75% of the value of invoices and organise insurance against bad debts. Deferred Tax Payments - corporation tax liability extends to one year after the profit is declared, (eighteen months after the average profit is earned). This money, if managed properly, can be used in the mean time to earn interest.

2) MEDIUM-TERM DEBT (nominally 1 to 10 years);Medium-Term Bank Borrowing - fixed or floating interest rates. - capital paid at end of loan period or throughout loan period. - rest period or holiday at the beginning of the loan period. Government Guaranteed Loans - set up in 1981. - Government will guarantee 70% of any loan to a small/medium size company. - maximum loan 75,000 for a period of 2 to 7 years. - government will charge 3% of loan. Merchant Banks - high risk (venture) loans. - often form consortiums to arrange loans. Export Finance - added risks, - Export Credits Guarantee Department, (Government Department underwrites bank loans). - Supplier Credits ECGD guarantees, (usually 90%), of any loan, (for exports), will be repaid even if the customer defaults. - Buyer Credits for contracts over 250,000. exporter and exporters bank will give a loan to overseas customer, (80%-85% of which is underwritten by the ECGD), to enable periodic payment of the contract. Hire Purchase - reduces initial capital expenditure. - regular payments. - at the end of the agreement, the asset can usually be purchased for a nominal fee.

- none ownership of the asset during the hire purchase agreement, means no tax advantage through capital (depreciation) allowance Sale and Lease-Back - typically freehold land and buildings, ie,- assets which appreciate in value over time. - immediate inflow of cash which can be used to generate profits. - regular payments. - payments are an expense, hence tax-deductable. - no appreciating asset. - may be more difficult to arrange long term loans in the future, ie.no asset to pledge as collateral. - may be liable to capital gains tax upon the sale of the asset. - the lease will come up for renewal, ie.- probable increase in rental charges, etc. Mortgaging Property - raise a mortgage on freehold land and buildings. - ownership of the asset doesnt change hands. - any appreciation on the asset value will benefit the mortgage owner. - Payments on the mortgage is reduced by inflation. - Payments on the mortgage is a legitimate business expense, hence its tax deductable. - However, higher initial cost of repayment than sale and lease back.

3) LONG-TERM DEBT for periods of 10 years. a) DEBENTURES (LOAN STOCK) - A document issued by a company containing an acknowledgement of indebtedness. The debenture will state;1) When the principle sum will be repaid 2) The rate of interest paid per annum on the debt. 3) Any restrictions, (covenants), placed upon the company;- disposal of assets. - taking on additional debt. - restrictions on paying dividends. - creation of a sinking fund. - etc. b) LONG TERM BANK and INSTITUTIONAL BORROWING Companies borrow directly from banks and other financial institutions, but without issuing tradable securities;- Costs - the interest rate can be fixed, but it is more likely to be floating, ie. typically 3%-6% above base rate depending upon the creditworthiness of the company. - Security - the loans are often secured against some asset of the company. Its also likely that the loan will impose other restrictions upon the companys activities. - Repayments - when and how the loan will be discharged. In particular, can the loan be paid back earlier, and if so, what is the penalty for early repayment. Register of Charges - any debt which includes a charge against a company or its assets must be registered, ie.- recorded in the Companys Register of Charges and also with the Registrar of Companies. Special Purpose Transactions - Often called Creative Accounting or Off Balance Sheet Techniques;1) Sale of Stock - and buy back;- increases sales revenue. - reduces stock levels. - no interest charge appears in accounts.

2) Assignment of Work In Progress - sale of future contract payments to a bank for cash in advance of costs incurred. 3) Redeemable Preference Shares - issued to a bank by a subsidiary company. The preference shares and their dividend will be shown in the subsidiary companys accounts but not in the holding companys consolidated accounts, (ie.- they will be included under the heading minority interests, hence their true nature will be disguised). The funds raised can then be used by any company with-in the group.