3.1. Law as an Accountability Mechanism Flashcards
Capital structure…
Refers to the money invested by shareholders.
For sole proprietorships, the owner has individual capital in the business.
For partnerships (both regular and limited), private limited liability and public limited liability companies, the owners (and shareholders) have collective capital in the business.
Public or private ownership structure…
Private capital: capital that is financed privately and that is not on the stock market. Ownership shares are bought and sold with the permission of the other owners.
Public capital: capital that is financed by the market and is traded on the stock market. Shares can be sold to investors to generate equity capital in the corporation.
PLCs are the only business legally allowed to issue shares on public stock markets. Financed originally by shares, debentures and bonds.
Legal duties…
Sole proprietorships and partnerships are only required to produce basic income statements and any tax bills are settled by the individuals, as they receive profits as personal income.
LLPs must produce full financial statements must tax is settled on a personal level.
LTDs and PLCs have set legal accountabilities. Must produce full financial statements which are held to accounting standards. External audits may be required and an annual report must be filed with the Registrar of Companies (Companies House).
Stock markets may also require further documentation from PLCs.
Legal personality…
Non-human entity which is given the status of a legal person.
The business must be registered with Companies House, provide legal names, addresses and details of the directors.
This legal person status entitles the business to rights, priviledges, responsibilities and liabilities. They cannot vote, have human rights or free speech.
Furthermore, the legal person status means the business or organisation can sue, be sued, enter into contracts, have debt, pay taxes and own property.
The entity is legally responsible for its actions, not the capital providers.
Limited liability…
Refers to the idea that the shareholders’ liability risk is capped at the amount of capital they have invested in the business.
The shareholders’ liability would not extend to their personal property, unless it was invested in the business.
Only LLPs, LTDs and PLCs benefit from this limited liability status.
With sole proprietorships and traditional partnerships, the owners can lose personal property beyond what they have invested.
LLPs…
Limited liability partnerships are governed under the Limited Liability Partnership Act 2000.
They operate under normal partnership rules, however the LLP is treated as a separate legal person and therefore limited liability exists.
Legal and accounting entities…
Accounting is still undertaken for the business as a separate entity from the owners.
However, where no legal personality exists, a business is not separate from its owners.
If no legal personality exists, the owner’s personal transactions are not included in business transactions.
