Companies and Governments

Using the City to Finance Growth or Raise Funds

Private sector companies are one of the City's main customers. These are usually medium- to large-sized businesses wanting funding or advice on expanding or managing their businesses. 

However, these private sector companies are not the only organisations which use the City. The British government, governments of overseas countries, local governments in both the UK and other nations - all use the City to raise funds.

Corporations in the public sector such as the NHS Trusts, and state-owned institutions, for example railways and airlines, also use the City to finance projects. Most of these are overseas organisations, as the UK no longer has major state-owned companies.

Main points about Companies and Governments:

The City's customers can be divided into two main groups: private sector companies and public sector organisations. These are state owned institutions including central and local governments.
There are two main types of private sector companies: those with unlimited liability and those with limited liability; the latter are also known as corporations.
Companies with unlimited liability include sole traders and partnerships. The owners receive all the profits of the business (after tax!) but are personally responsible for meeting any losses the business incurs. Their financial requirements tend to be for overdrafts or small loans, usually obtained from their local banks rather than from the City.
Most companies that use the City's services are corporations - that is businesses which have limited liability. These businesses have a separate legal identity from their owners and the business can hold assets in the business's name.
The company, rather than the individual owners, is held responsible for its actions. The owners' potential loss is limited to the amount that they have invested in the company. There are several different types of corporations in the private sector.
Limited Liability Partnerships (LLPs) are a modified type of partnership. In an LLP, one partner is not legally responsible for the actions of other partners, and therefore has 'limited liability'. LLPs have a separate legal identity, which makes them 'corporations'. Some are large companies such as the John Lewis Partnership.
Private companies limited by guarantee are companies that do not have share capital. The liability of its members is limited to the amount the members wish to contribute to the assets of a company in the event of it being wound up. These companies are mainly charities and not-for-profit organisations. The Baring Archive is a company limited by guarantee.
More common are private limited companies (Ltd). These companies have shareholders but the company's shares cannot be bought and sold by the general public. An owner's liability is limited to the share they own in the company. Most are medium sized but some companies are large, for example, the Virgin Group Ltd.
Privately owned companies may come to the City to seek advice on obtaining loans or private equity investment (selling additional shares to private investors), or they may want advice on becoming a public limited company and floating the company on the stock exchange.
Despite their name, public limited companies (plc) are not part of the public sector; they are a private sector company that can offer their shares for sale to the general public on a stock exchange. They must have at least £50,000 share capital, and they must make their business affairs public to a large degree. Examples are British Sky Broadcasting Group (BSkyB) plc and Tesco plc.
Public limited companies come to the City for advice when they: want to raise money to expand their business; are interested in investing in new markets; want assistance in managing their financial assets (particularly when trading internationally); want advice on raising finance to purchase other businesses or on selling off part of their own business.
Large public companies issue bonds on a regular basis. Bonds can be bought and sold in exactly the same way that shares can and this is a major activity for investment bankers in the City.
Co-operatives are special types of businesses that are owned and run by their members, who equally share the profits.       Co-operatives form when working together can be beneficial. There is no Co-operatives Act in the UK so there are various legal structures including limited liability partnerships.
Private Sector Companies are not the only organisations to use the City. Governments including the British government and those of overseas countries, local governments in both the UK and other nations (which provide a range of locally based services to citizens) - all sell bonds on the stock exchange.
Public sector organisations that are financed by governments also use the City's services. NHS Trusts in the UK and school boards in the USA, as well as public service organisations such as state-owned railways and airlines, all issue bonds. These organisations are also corporations with limited liability.
This public debt is used to finance large infrastructural capital projects or to smooth out cash flow imbalances. It allows the costs of capital assets to be spread over time providing new investment when it is needed rather than when enough cash has been saved.
Public sector companies are also active in buying bonds. Often, such institutions prefer bonds to shares as it means that they can avoid the necessity to participate in the ownership of companies.
 
 

The Development of the Modern Company

Corporations play an important role in the economy. Some are very large with turnovers of several billions. However, their development has been relatively recent.

Early traders acted either as individuals or in partnerships. They were entirely responsible for paying back all the debts they incurred. If the business failed, they and their families were ruined.

In medieval times, the Crown granted charters to set up companies. The best-known examples are town corporations. Corporations had their own legal rights, separate from those of their members. The corporations could own property and, when a member died, the corporation could continue unaffected.

In Tudor times, groups of merchants could get the King to grant them a charter setting up a corporation or company.

Such companies had great advantages over partnerships between individuals. Most importantly, the individual members of a company were not responsible for all the debts of the company, as they would have been with a partnership.

'Limited liability' meant that a company member's potential loss was limited to the value of the money they had put into the company. As a result, many wealthy Englishmen became keen to invest in these companies.

When Europeans started trading overseas in the 16th century, the huge expense of the voyages and the enormous risks they involved meant that only monarchs could afford to fund the ventures - until joint-stock companies were formed.

The individual members of these companies bought shares in them. By the end of Elizabethan times these shares were being bought and sold by merchants. During Stuart times this trading led to the emergence of the stock exchange.

The Industrial Revolution saw the rise of factories employing hundreds of workers. This created a need for many more large companies. Most of the early industrial companies were partnerships, as were other businesses including banks. It still required a royal charter to form a joint stock company.

The risk of business and personal bankruptcy for these company owners was ever-present, and partly explains their reputation for hard-heartedness. Many businesses that failed saw the partners lose their houses and possessions. Another severe problem was finding capital for start-up and growth for those without the wealthy connections.

In 1844, the Joint-Stock Companies Act allowed joint-stock companies to be formed without the need for a royal charter or an Act of Parliament. However, company shareholders still had unlimited liability for business debts.

In 1855 and 1856, two Acts - the Limited Liability Act and the Joint-Stock Companies Act - gave limited liability to company shareholders and made it much easier to set up companies. Barings Bank itself was re-established in 1890 as a limited liability company, after the partners had lost their houses and personal possessions following a disastrous investment.

The Limited Liability Act and Joint-Stock Companies Act continue to be modified, but in effect they led to the rise of the modern corporation as we know it today, including both privately held companies and those public companies with a widely dispersed shareholding.

The trading life of these companies is not linked to an individual and so the company can accumulate assets over a long period of time. This has enabled huge companies to grow over several generations.

The rise of the large corporation led to the development of new methods of management. Typically corporation shareholders elect a Board of Directors which, in turn, chooses the officers and hires the top management. Annual meetings are required of both the shareholders and the Board, and major policy decisions must be made by resolution of the Board.