Limited Liability Company: Merits and Demerits, Financial Analysis of Next Plc

This report provides a clear understanding about the Limited Liability Company form of business and highlights the merits and demerits of the same. It discusses the facts which differentiates LLC from other form of business and provide insights about their operations. The report also outlines the importance of company’s financial statements by undertaking an analysis of the same with the help of relevant ratios. It highlights the financial position and performance of Next Plc by analyzing its annual reports of past five years.

accounting

Contents
Introduction.................................................................................................................................................2
Requirement 1.............................................................................................................................................2
Requirement 2.............................................................................................................................................5
Conclusion...................................................................................................................................................9

Introduction
This report provides a clear understanding about the Limited Liability Company form of
business and highlights the merits and demerits of the same. It discusses the facts which
differentiates LLC from other form of business and provide insights about their operations. The
report also outlines the importance of company’s financial statements by undertaking an analysis
of the same with the help of relevant ratios. It highlights the financial position and performance
of Next Plc by analyzing its annual reports of past five years. Graphical representation of the
same has also been given, followed by a conclusion in the end.
Requirement 1
A limited liability company is a kind of hybrid entity which encloses the features or
characteristics of both the company and partnership. It is a corporate structure under which the
members of the entity are not personally obliged or liable for the financial obligations and
liabilities of the company. The fact that its feature is similar to corporation and availability of
flow through taxation for the members is same as partnership; makes LLC a hybrid entity. The
main motive of the owners to choose LLC as a form of business is to limit the personal liability
of the principal. Moreover, it is much easier to establish as compare to other forms and it
provides more flexibility and protection than the partnership or sole proprietorship (Cornwall,
Vang, & Hartman, 2016).
The ownership in Limited Liability Company works in many ways. The owners are
called as members comprising of individuals, business entities or both. In order to form a LLC,
an appropriate organizing document has been filed with the state agency that declares the number

of issues which are discussed between the owners in respect of LLC membership. When
establishing this kind of business, the members are required to decide about many things such as
amount of capital contribution, manner in which the profits and losses will be allocated, voting
rights of the owners and many more. Apart from this, there are many merits and demerits of LLC
which make it different from other business types. They are as follows:
Merits of LLC
 As the name says, the liability of the members in relation to company’s debt and
obligations is limited to their own capital contribution. It is considered to be a key
advantage as the owners are not personally liable for corporation’s financial obligation.
In simple words, if in case the entity become insolvent or get sued, the personal assets of
the member like bank accounts are protected as they have limited liability (Cornwall,
Vang, & Hartman, 2016).
 Another advantage is that the income from LLC is treated as the personal income of the
members and because of that it is not subject to some federal taxes, for which many
companies or corporations are liable. LLC allows the owners to pass through the taxation
purposes.
 High flexibility is there as the amount invested by the individual does not need to be
equal to the percentage of their ownership. At time of creating a LLC, an operating
agreement is prepared in which allocation basis for profit and loss is decided irrespective
of the investments made by the owners. So, flexibility is there in investing without
concerning the ownership (Barr, & McClellan, 2018).

 In LLC, there is no need to have a board of directors, conduct annual meetings or comply
with strict requirements. There is a freedom in management which save a lot of time and
stress of the members (Cornwall, Vang, & Hartman, 2016).
Demerits of LLC
 It is very difficult to build capital for LLC due to lot of legal obligations and state filings
associated with the addition of new member in the company (Burger, Kaufman, &
Atkinson, 2015).
 High fees are required to be paid by LLCs to the states as compare to other form of
business entities. Also, many states require the renewal fees on yearly or periodic basis.
 Not every business can become a limited liability company due to the protections offered
to LLC by the government. Businesses like banks, insurance companies, and medical
firms are prohibited to become a LLC (Cornwall, Vang, & Hartman, 2016).
 One of the disadvantages of LLC is that there is a lack of uniformity in the requirements
of the state statues that regulates Limited Liability Company.
LLC Sole proprietorship Partnership
Owners have a limited liability
and are not responsible for
company’s debt
Unlimited liability is there and
the proprietor is personally
liable for firm’s liabilities
Partners are required to use
their personal assets if the firm
runs out of funds.
Easy to transfer the ownership
interests.
Cannot sold the entire
business in one go.
Each asset, license and others
are transferred individually.
Comparatively, it is expensive
to setup.
Easy and cheap to form a sole
proprietorship.
Lower setup charges are
involved.

More paperwork and
organized procedures are
involved in forming LLC
Can be opened without any
formal process.
Does not require much formal
procedures.
Requirement 2
Next Plc is a UK based company operating in the retail sector. It is engaged in the
business of clothing, accessories, footwear and retailing of home products in United Kingdom,
the Middle East, Europe and Asia. The company has six segments through which it operates and
also provides online service to its customers. Moreover, it has approximately 200 franchised
stores functioning under the name Next International Retail on a global level (McKinney, 2015).
Liquidity or working capital ratios
These ratios determine the financial health of the company by measuring its capabilities
of paying its short term obligations with its current and most liquid assets. They reflect the
overall liquidity position of the firm.
Current ratio: It is one of the liquidity ratios that measure the current assets of the firm against its
current liabilities. The ideal ratio is 2:1 which means that every firm should have its CAs double
of its CLs in order to facilitate smooth functioning of the business.
In case of Next Plc, the ratio has increased from 2014 to 2017. It was 1.76 in 2014 which rose to
2.29 in 2017 but recently it falls to 1.96, almost close to the industry benchmark. The upsurge
was due to the fact that the liabilities of the company has reduced over the years. The ratio
declined in 2018 due to the reduced cash balance of the company.

Quick ratio: it is another liquidity ratio which measure the capability of the company by
evaluating its short term obligations against its most liquid assets. The standard ratio required is
1:1 (Matthew, 2017).
It can be observed that the ratio constantly reduced from 2014 to 2016 as it reached to 0.88 from
1.18. After that a reverse trend was there as the ratio increased to 1.49 in 2017 and again reduced
to 1.32 in 2018 (Finkler, et al. 2016).
2014 2015 2016 2017 2018
0
0.5
1
1.5
2
2.5
Liquidity ratios
Current ratio
Quick ratio
years
values
Profitability ratios
These are the other financial metrics which deals with the measurement of company’s overall
profitability. They are very much useful for the investors as they reflect the competency of the
firm in making high returns to the shareholders.

Net profit ratio: It determines the amount of profit and express the same as the percentage of
sales revenue. The net margin of Next Plc has increased during the past five years from 14.81%
to 15.53% in 2017 and 14.595 in 2018. This was due to the upsurge in company’s total revenue
and the reduction in its expenses which boosted up its profits.
Return on equity: it measure the amount of return offered by the company to its shareholders out
of the profits earned by it during the year. The ROE of Next PLc was 193.43% in 2014 which
increased to 210.41% in 2016. However the same reduced in 2017 and 2018, reported at
154.52% and 119.18% respectively. This was due to the reduction in net profit during the years
and increase in company’s shareholders’ equity.
2014 2015 2016 2017 2018
0
50
100
150
200
250
Profitability ratios
Net Margin %
Return on Equity %
years
%
Investors’ ratio
These are the market value ratios which reflect the stock performance of the company. They
provide insights to the investors about the market performance of the company’s stock (Burger,
Kaufman, & Atkinson, 2015).

Earnings per share: it defines the portion of company’s profit allocated to each outstanding share.
The EPS of Next Plc has increased over the years which reflected that the firm has performed
well in its past years (Cornwall, Vang, & Hartman, 2016).
Dividend payout ratio: it is the measure of dividends which are been paid out to the shareholders.
The company’s DPR has also shown an increasing trend which reflect the company has earned
sufficient profits to declare high dividends to its shareholders. It also means that its market
performance has enhanced during the past five years (Barr, & McClellan, 2018).
2014 2015 2016 2017 2018
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Investor's ratios
Earnings Per Share GBP
Payout Ratio
years
values

Conclusion
After assesing all the detais and information, it could be inferred that captial budgeting
and ratio analysise are the best tool to evalute the fiinancial sustainbiltiy and perforamnce of
comapn . However, Next Plc has increased its overall earing and also strengthten its busienss
performance throhgout the time. The profitability of company have changed increased by 20%
which is good indicator for the investors to create valeu on their captial by investing in Next
Company. Company needs to adjust its working captial and liquidity captial in its business if it
wants to strengthen its business in lon run.

References
Barr, M. J., & McClellan, G. S. (2018). Budgets and financial management in higher education.
UK: John Wiley & Sons.
Burger, R. H., Kaufman, P. T., & Atkinson, A. L. (2015). Disturbingly weak: The current state of
financial management education in library and information science curricula. Journal of
Education for Library and Information Science, 56(3), 190-197.
Cornwall, J. R., Vang, D. O., & Hartman, J. M. (2016). Entrepreneurial financial management:
An applied approach. Australia: Routledge.
Finkler, S. A., Smith, D. L., Calabrese, T. D., & Purtell, R. M. (2016). Financial management for
public, health, and not-for-profit organizations. UK, CQ Press.
Matthew, B. T. (2017). Financial management in the sport industry. Australia: Routledge.
McKinney, J. B. (2015). Effective financial management in public and nonprofit agencies.
Australia: ABC-CLIO.
Ward, A. M., & Forker, J. (2017). Financial management effectiveness and board gender
diversity in member-governed, community financial institutions. Journal of business
ethics, 141(2), 351-366.
Zietlow, J., Hankin, J. A., Seidner, A., & O'Brien, T. (2018). Financial management for
nonprofit organizations: Policies and practices. Australia: John Wiley & Sons.