1. The Nature of a Limited Company Flashcards
What is the most common form of private sector organisation?
Limited companies are the most common form of private sector organisation.
Business that are not limited companies tend to be small in size, or provide specialised professional services, such as firms of accountants or solicitors.
Why is a company’s separate legal existence important?
A company has a separate legal existence, independent of its owner(s). It can enter contracts in its own name, it can sue or be sued, and it is liable to the tax authorities for tax on the profits that it earns.
The profits available to the owners of a company are profits after deducting taxation.
Because a company has this legal identity, separate from its owners, the way it raises capital from its owners, and is accountable to its owners for the capital that it holds, is more formalised than for sole traders.
Explain a company’s initial capital.
A company’s initial capital is divided into units of equal size, known as shares, issued to individuals or companies, called shareholders.
The total capital raised is referred to as equity share capital.
What does ownership of shares entitle the owner to?
Ownership of a share entitles the shareholder o receive payment of a share of profit, or dividend.
What is ‘par value’?
By law, shares must have a par value (the Companies Act 2006 calls this the ‘nominal value’, which can be any amount.
However, all shares of the same type (‘class’) have the same par value.
It is possible to have different classes of share which carry different rights for the owners.
A share’s par value will rarely bear any relationship to? (2)
The par value will rarely bear any relationship to:
1. The issue price at which the share was originally issued by the company, to raise capital; or
2. The current market value of the share if the shares of the company are traded on a stock market.
Why does the original issue price of a share matter to the company?
The original issue price of a share matters to a company because it is the amount of cash raised for each share issued.
A company will often issue shares at above (‘at a premium to’) par value.
How does the current market value of a share affect the financial statements?
The current market value of a share has no bearing on company financial statements at all, because this is the price at which an existing shareholding is sold by one person (not the company) to another person (not the company). Such transactions do not give rise to anything that has to be recorded in the company’s accounting records.
What is a public company?
A public company has ‘plc’ in its name. A public company may offer its securities (shares and loan stock such as bonds) for sale to persons who are unrelated to the company (‘the public’), but is subject to stricter regulation than private companies.
In particular, a public company must have issued capital of at least £50,000. Before it can trade, at least £12,500 plus the the whole of any premium on issue must have been received as cash.
Effectively this means that a public company must have net assets (assets less liabilities) of at least £12,500. Note, that all companies whose shares are traded on a stock market must be ‘plcs’, but not all plcs have their shares traded on a stock market.
What is a private company?
A private company ends its name with ‘Limited’ or ‘Ltd’.
A private company is any company that is not a public company. Private companies cannot offer their securities for sale to the public at large. There is no minimum level of net assets.
What company characteristics are accounted for? (As part of this course) (5)
- Equity (owners’ capital comprising share capital, retained earnings and other reserves), rights issues and bonus issues
- Forms of debt capital (non-current liabilities)
- Provisions
- Tax on profits
- Dividends
