Business ownership and sources of finance

Share capital is finance a company raises by selling shares to investors (1). It can be raised privately by an Ltd or publicly on a stock exchange by a plc (1).

If a business is an unincorporated sole trader or partnership, it has no shares to sell, so it cannot raise equity from outside investors (1). This means it depends on owners' savings, retained profit and loans (1), and because loans are capped by the owner's personal wealth and unlimited liability makes lenders cautious, the total finance it can raise is restricted (1).

The first way is that the business can sell shares privately. As a private limited company it becomes incorporated and can issue shares to invited investors such as family, friends and business contacts. This raises equity finance that a partnership cannot access, so the firm can fund growth without relying solely on the partners' own money.

The second way is improved borrowing. Because shareholders now have limited liability and the business looks more established as a company with published accounts, lenders are more confident. This means the firm can usually borrow larger sums on better terms than the partnership could.

Together these widen the finance available, although the company still cannot sell shares to the general public — that requires becoming a plc.

The form of ownership sets the menu of finance a business can use, both which sources are possible and how easily it can obtain them.

For an unincorporated sole trader or partnership, the form is restrictive. There are no shares to sell, so equity from outside investors is impossible; the firm depends on owners' capital, retained profit and loans. Because the owners have unlimited liability and the business is usually small, lenders see higher risk, so loans are smaller, costlier and often need personal assets as security. The result is a low finance ceiling that can constrain growth.

Becoming an incorporated company changes this. An Ltd can sell shares privately to invited investors, and limited liability plus company status make lenders more confident, widening borrowing. A plc goes furthest: it can sell shares to the public on a stock exchange, raising very large share capital, and large established plcs can borrow huge sums at low interest because they look low-risk.

Therefore the form of ownership has a strong effect on raising finance: it determines whether equity is available at all and shapes lender confidence. As a firm moves up the ownership ladder it unlocks more finance — which is precisely why growing businesses tend to change their form.

Becoming a private limited company would widen the partnership's access to finance in important ways. As an incorporated company it could sell shares privately to invited investors, raising equity the partnership cannot — finance that does not have to be repaid like a loan. Limited liability would also make outside investors more willing to put money in, and lenders more confident, so the firm could borrow larger sums on better terms. For a successful partnership needing significant finance to expand, these are exactly the constraints that incorporation removes.

However, there are drawbacks. Forming and running a company brings more legal cost, regulation and disclosure, and bringing in shareholders means sharing profit and some control — which partners used to running things themselves may dislike. Crucially, an Ltd still cannot sell shares to the public, so if the expansion is very large, even an Ltd may not raise enough, and the firm might eventually need to become a plc. If the finance need were modest, simply taking a bank loan or admitting a new partner might be cheaper and simpler.

Judgement. Becoming an Ltd is likely to be worthwhile because the partnership is successful and needs significant finance — limited liability and private share sales matter most exactly when a firm is expanding and raising substantial sums. The decision is less justified if the finance need is small (simpler sources would do) or so large that only a plc would suffice. On balance, for a successful partnership facing a significant but realistic expansion, incorporating to an Ltd is the stronger route to finance, provided the partners accept more regulation and shared control — judged against the size of the finance need relative to what each form can raise.

A growing business can raise finance in many ways, and its form of ownership decides which are open to it. Becoming a plc unlocks the largest source of all — public share capital — but whether it is the best route depends on the firm's size, finance need and willingness to give up control.

The case that becoming a plc is best. Only a plc can sell shares to the public on a stock exchange, raising very large amounts of equity that no other form can reach. This finance does not have to be repaid like a loan and can fund major projects — new factories, takeovers, international expansion. Large, well-known plcs also enjoy strong lender confidence, so they can borrow huge sums at low interest. For a business with ambitious, large-scale growth plans, the plc form may be the only way to raise finance on the scale required.

The case that it is not always best. First, becoming a plc is expensive and heavily regulated, with full disclosure of accounts — costs that outweigh the benefit for a firm whose finance need is moderate. Second, selling shares to the public dilutes the owners' control and creates a serious risk of takeover, since anyone can buy the shares; an owner who values control would avoid this. Third, there are cheaper, simpler alternatives: a growing firm might fund expansion through retained profit, a bank loan or mortgage, private share sales as an Ltd, venture capital or government grants — often without giving up control or facing public scrutiny. Fourth, the divorce of ownership and control in a plc can create conflict and short-term pressure that harm long-term decisions.

Weighing it up (criterion). Whether the plc form is best depends on the scale of finance the business needs relative to what cheaper forms can raise, and how much the owners value control. For a business needing finance on a scale only public share capital can provide, and willing to accept reduced control, becoming a plc is indeed the best route. For a business whose growth can be funded by retained profit, loans or private share sales, the cost, loss of control and takeover risk of a plc make it the wrong choice.

Judgement. Becoming a plc is the best way to raise finance only for businesses whose finance needs genuinely exceed what other forms can supply and whose owners accept diluted control. For most growing firms, smaller-scale and cheaper sources — retained profit, loans, or private share sales as an Ltd — are more appropriate, because they raise enough finance without the cost, disclosure and takeover risk of going public. So becoming a plc is best in some cases but far from all; the right answer depends on matching the form to the size of the finance need and the owners' priorities.