Limited Company
If a business wishes to expand it will inevitable require additional capital; forming a limited company makes it possible to raise the required funds and also provides additional features that are attractive to the owner(s) as follows:
Limited liability - the capital of a limited company is divided into shares. Shares can be of any nominal amount, for example, $5, $10, $25 per share. To be become a member of a limited company, or a shareholder, a person must buy one ore more of the shares.
A shareholder can only lose the amount they have invested in the company which comprises of money paid for shares or the balance due on shares. Their person assets are safe. This is known as limited liability and the company hase known as a limited company.
Seperate legal entity - one of the most important features of a limited company is its status in law as a seperate legal entity. This means that the company is treated seperately from the shareholders who own the company. Thus, acompany may sue someone in its own name and likewise be sued in the company name.
Raising capital - one of the main reasons for forming a limited company is to raise large amounts of capital is by issuing shares to prospective investors. In smaller private companies, shares are issued to family and business colleagues who then become shareholders (i.e. members) of the company. Large public limited companies issue their shares to the general public, hence the name "public" limited companies.
Types of Limited Company
There are two classes of company: the public limited company (abbreviated PLC) and the private limited company (abbreviated Ltd). In the UK, private limited companies far outnumver public limited companies. A public company must have a minimum of two directors.
Share capital
The share capital is the capital of a company which is divided into shares which are then bought and owned by the shareholders. There are two main types of share capital, namely, authorised share capital and issued share capital. It is important to distinguish between two:
1. Authorised share capital - is the maximum share capital that a company is allowed to issue, also called the "nominal capital"
2. Issued share capital - is the amount of share capital that the company has actually issued
Shares and dividends
1. Ordinary shares - these shares are by far the most popular way that companies use to raise capital. Ordinary shareholders will recieve a variable share of profits in the form of a dividend based on the number of shares that each shareholder owns. Ifa company makes a loss, no dividend would be likely to be paid, hence shares are more risky than preference shares.
2. Preference shares - shareholders buy these shares knowing that they will get an agreed precentage rate of dividend. They will be paid this agreed amount before dividends are paid to ordinary shareholders. Preference shareholders can attend company meetings but have no voting rights.
3. Dividends payable - a successful company is very likely to pay a dividend based on its net profit. It is, however, unlikely that all this profit will be available for distribution since the company may decide to retain a proportion in the form of revenue reserves
Debentures
Debenture is a loan which is taken out by a limited company. A company may borrow money from a bank, or from other sources, and when this occurs a debenture certificates is issued by the lender. The features of a debenture include:
- A fixed rate of interest is paid by the company to the investor annually (the debenture interest).
- The interest must be paid irrespective of whether the company makes a profit.
- Debentures are often secured on the fixed assets of the business, thereby making it a safer investment for the investor.
- If the company gets into the financial difficulties the debenture holders are one of the first claimants to be paid.
Trading and profit and loss accounts
In appropriation account, it shows how the net profits are to be apportioned, i.e. how the profits are to be taxed and the balance distributed. Items for distribution include:
- dividends declared
- transfer to and from reserves
- amounts of goodwill written off
- amounts of preliminary expenses written off - these are all the costs incurred when a company is formed
Balance sheet of limited company
