As Accounting: Limited Companies

Articles of Association

A document that contains the rules governing the internal organisation of the company detailing directors' powers, voting rights, conduct of meetings, etc.

Memorandum of Association

A document that details the company's external relationship with the outside world. It gives details of the company's name, address and registered office, the company's share capital and the company's objectives

Private Limited Company 'Ltd'

A private limited company cannot offer their shares to the general public. Therefore, its shares cannot be sold on the stock exchange. There is no minimum requirement for issued share capital. The company must have at least one shareholder and at least on director.

Public Limited Company 'plc'

A public limited company may offer their shares to the general public and its shares can be traded on the stock exchange. Their authorised share capital must be at least 50,000 pounds, and the company should have at least two directors

Define: Share Issued at Par

A share issued at its nominal value

Reserve

Amounts of profits retained in the business and not distributed to shareholders

Limited Liability Company

An organization owned by its shareholders, whose liability is limited to the amount of individually owned fully paid-up shares. The company is a separate legal entity from its members.

What are preference shares?

Shares entitles to a fixed rate of dividend that is apportioned ahead of any ordinary share dividend. Preference shareholders are seen as holding the shares with lower risk because they are more likely to receive a dividend.

What are ordinary shares?

Shares with no guarantee of dividend payment as each share has a variable rate of dividend dependent on the level of profit. Ordinary shareholders are seen as holding the shares with higher risk because their dividend isn't guaranteed if there is insufficient cash and profits are low; and ordinary shareholders are paid last out of the remaining profit left after the dividend of the preference shareholders has been paid.

Define: Issued Share Capital

The amount of share capital that the company has actually issued to shareholders which cannot exceed the authorised amount

Paid-up Share Capital

The amount of shares that has been issued and paid for by the shareholders

Shares

The capital of a limited company is divided into units called shares (ownership of a company). Shares have a nominal value but can be issued at a premium when traded at a price higher than their nominal value

Define: Separate Legal Entity

Companies have their own legal existence (seen to be a person in the eyes of the law), and is thus liable for its debts

What are the different types of preference shares?

Cumulative, non-cumulative, and redeemable

Cumulative Preference Share

In the event of there being insufficient profit in the current year, shareholders are entitled to have arrears of their dividend carried forward until profits are large enough to pay the arrears

Non-cumulative Preference Share

In the event of there being insufficient profit in the current year, shareholders are not entitled to have arrears of their dividend carried forward

Redeemable Preference Share

Issued shares that can be bought back by the company at a future date

What is the benefit of limited liability?

Limited liability reduces the shareholder's risk, making it more likely for the shareholder to finance the company's capital

Financing of shares

Long-term funds companies raise to finance their activities. These are share capital and loan capital

Directors

Officials appointed by shareholders to manage the company for them. A director can, but does not have to be, a shareholder

How are partnerships different from limited companies as far as taxation is concerned?

Partnerships are not required by law to pay tax on their profits. Companies are liable to pay tax on their profits. The tax paid is treated as an appropriation of profit

How are partnerships different from limited companies as far as distribution of profit is concerned?

Partnerships share profits and losses as per their partnership deed or equally if there is no partnership deed. Companies distribute their profits to their shareholders in the form of dividends. They may not distribute all the profits made and any undistributed profit is retained in the company as a reserve.

Define: Share Premium

The difference between the nominal value of shares and the price at which they are issued

Share Capital

The issue of shares

Define: Limited Liability

The liability of any shareholder to the debts of the company is limited to the amount of their fully paid-up shares.

Define: Authorised Share Capital

The maximum amount of share capital that a limited company is allowed to issue to shareholders, under its constitution

Shareholders

The owners of the share capital of a limited company. Shareholders invest in the company by buying shares in the company. Shareholders receive a share of the profits in the form of Dividends, have voting rights for directors, and have limited liability

Define: Nominal Value

The price description of an issued share under the company's constitution