Module 2 - Companies: Formation and operations

Question 1

Name the 4 categories of companies?

Answer 1

1. Limited companies
2. Unlimited companies
3. No-liability companies
4. Special companies

Question 2

What are the 3 types of limited companies?

Answer 2

Proprietary companies
Public companies
Companies limited by garuntee

Question 3

Name the 3 types of special companies?

Answer 3

Investment companies
Bank companies
Life insurance companies

Question 4

What is the main reason for setting up a company?

Answer 4

The main reason for setting up a company is because it permits owners to have limited liability to the extent of the amount invested

Question 5

How many people are required to form a proprietary company?

Answer 5

as little as 1 but up to as many as 50 shareholders.

Question 6

What tests must a proprietary company pass to be considered small?

Answer 6

1. gross revenue less than $25m for the year
2. gross assets valued less than $12.5m
3. fewer than 50 employees

Question 7

What is a major advantage of a public company?

Answer 7

its ability to raise capital from the public through shares, debentures and unsecured notes or loans

Question 8

What is a prospectus?

Answer 8

It is a disclosure document for the issuing of shares or debentures for the public so investors can make informed decisions

Question 9

Define unlimited companies?

Answer 9

members are liable for all debts of the company, they are not common in Australia

Question 10

What industry does a no-liability company work in?

Answer 10

Mining

Question 11

What are the advantages of the corporate entity?

Answer 11

limited liability
broad source of capital
continuity of existence
ready transferability of shares
use of professional management
potential income tax savings

Question 12

What are the disadvantages of a corporate entity?

Answer 12

greater government regulation

separation of ownership & management

Question 13

The rules for governing the internal affairs of a company are called what?

Answer 13

Replaceable rules

Question 14

What is the alternative to replaceable rules?

Answer 14

Constitution

Question 15

What do replaceable rules deal with?

Answer 15

1. appointment, powers and remuneration of directors
2. directors’ meetings,
3. members’ meetings,
4. share transfers
5. and inspection of the company’s books by members

Question 16

What is the certificate of registration?

Answer 16

approval of the company’s application for registration and the issue of their ACN

Question 17

What are the 3 major categories of equity in a company?

Answer 17

1. share capital
2. retained earnings
3. other reserves

Question 18

Define share capital?

Answer 18

Share capital is an equity account representing the amount of assets invested in the company by its shareholders, for public companies this may be preference or ordinary.

Question 19

Define retained earnings?

Answer 19

a special type of reserve account that reflects the amount of profits (after tax) earned by the company and retained in the business

Question 20

What are some common equity reserve accounts called?

Answer 20

1. general reserve
2. options reserve
3. plant replacement reserve
4. currency fluctuation reserve

Question 21

Define dividends?

Answer 21

Dividends are simply a distribution of cash or other assets, or of a company’s own shares, to its shareholders

Question 22

What is the most common type of dividend?

Answer 22

Cash dividend

Question 23

Under what circumstances can dividends be paid?

Answer 23

When assets are greater than liabilities, it is fair to all shareholders and it will not impact the ability to pay creditors.

Question 24

What are preference dividends?

Answer 24

Dividends pay to preference shareholders first, before ordinary shareholders as part of their ownership rights

Question 25

What is a Share dividend?

Answer 25

it is the issue of new shares to existing shareholders in place of a cash dividend, this allows companies to retain cash for investment purposes

Question 26

What are share splits?

Answer 26

unlike share dividends this is not a dividend or payment to shareholders but a strategy in which a company can reduce its share price by splitting each share into 2 or 4 and lowering the share price making it more attractive to more investors