1. The Nature of a Limited Company

Question 1

What is the most common form of private sector organisation?

Answer 1

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.

Question 2

What is a private company? What is a public company?

Answer 2

A private company ends its name with ‘Limited’ or ‘Ltd’.
A private company is any company that is not 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.

Question 3

Why is a company’s separate legal existence important?

Answer 3

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.

Question 4

Explain a company’s initial capital.

Answer 4

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.

Question 5

What does ownership of shares entitle the owner to?

Answer 5

Ownership of a share entitles the shareholder to receive payment of a share of profit, or dividend.

Question 6

What is ‘par value’?

Answer 6

By law, shares must have a par value (or ‘nominal value’ or ‘face value’), which can be any amount (e.g £1, 1p, 50p).

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.

Question 7

A share’s par value will rarely bear any relationship to? (2)

Answer 7

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.

Question 8

Why does the original issue price of a share matter to the company?

Answer 8

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.

Question 9

What company characteristics are accounted for? (As part of this course) (5)

Answer 9

1. Equity (owners’ capital comprising share capital, retained earnings and other reserves), rights issues and bonus issues
2. Forms of debt capital (non-current liabilities)
3. Provisions
4. Tax on profits
5. Dividends