Chapter 1: Limited Companies Flashcards
Sole trader/partnership features
Sole trader - one proprietor
Partnership - more than one proprietor/partner
Owned and managed by the proprietor
Personal and business transactions must be kept separate but it is the owners who will enter into any contracts
Unlimited liability - personally responsible for the debts
Limited companies features
Ltd - private limited company, cannot invite members of the public to become shareholders
Plc - Public Company, shares are traded publicly, often on the stock exchange
owned by shareholders
managed by directors
Separate legal entity - the company itself can enter into contractors in its own right
Limited Liability - shareholders liability is limited to the shares they have paid for, company is responsible for its own debts
directors v shareholders
Directors appointed by shareholders, day-to-day managing of the business, entering the contractors in the company’s name, directors decide to pay shareholders a didivend
Shareholders - if unhappy with the running of the company, they do have the right to insist that the directors call a general meeting where they can vote on key decisions such as appointment and removal of the directors and auditors
Adv of limited company
Limited liability
Easier to raise finance - issue shares and other securities such as assets
Company continues to operate regardless of ownership
Taxed under corporation tax
disadv of limited company
Accounts submitted to companies house, anyone can access them
more regulation (companies act 2006) - restrictions on what the business can do / how it must be managed as well as placing additional reporting regulation on the company
Accounts of larger companies must be audited - can provide a significant cost for the business
Issues of shares are highly regulated, heavily controlled
Financial statements for sole trader, partnership and limited company
Sole trader/partnership - profit and loss and balance sheet
Limited company - profit and loss, SOFP, statement in changes in equity, statement of cashflow, notes to financial statments
Differences in SOFP sole trader v limited company
Sole trader - funds the business through personal capital, shown under proprietors interest
Capital + profit - drawings = proprietors interest
Limited company - shareholders own the business and therefore proprietors interest section is replaced by equity
Share capital + retained earnings + other reserves = equity
nominal value of shares
Nominal / face value / par value
Nominal shares is the face value of the shares. This is decided at the time of issue of the original shares and will remain the same going forward
Share capital will always show the nominal value of the shares.
For example a company may have 100 shares in issue with a nominal value of £1 each. Therefore share capital will be £100
Market value of shares
This is the value at which existing shares can be traded, the price the owner of the shares will charge someone else to buy them
not reflected in financial statements
Allotted share capital
Shares which have actually been issued, or issued share capital
Ordinary shares
Sometimes called equity shares
Ordinary shareholders can receive a dividend
Holders of the shares are entitled to vote in a general meeting
Preference shares
Carry the right to a fixed rate dividend
must be paid a dividend before any dividend is paid to ordinary shareholders
do not have any voting right
if redeemable there is an obligation to redeem them in cash, they may be classified as a liability rather than equity
Irredeemable preference shares under equity
Retained earning
accumulation of profit and losses over the years less any dividend
undistributed profits to date
