Limited companies

Question 1

What are aims of the financial statements of the business?

Answer 1

1) To identify how well the business has performed in the period. By calculating the profit or loss generated in the period
2) To identify the value of the assets and the liabilities of the business SOFP=balance sheet
3) To help understand the cashflow position of the company
4) To communicate these things to the users of the accounts in a clear manner

Question 2

What is an unincorporated business?

Answer 2

Sole trader = one proprietor
Partnership = more than one proprietor/partner

Question 3

What is an incorporated business?

Answer 3

A company that can be
Ltd = Private limited company (cannot invite members of the public to become shareholders)
or
Plc = Public company (shares are traded publicly, often on the stock exchange)

Question 4

Who owns a company?

Answer 4

Shareholders

Question 5

Who owns a sole trader/partnership?

Answer 5

Proprietor

Question 6

Who manages a sole trader/partnership?

Answer 6

Proprietor

Question 7

Who manages a company?

Answer 7

Directors
i.e. ownership and management are different in an incorporated company

Question 8

What legal entity rule is for a sole trader/partnership?

Answer 8

Personal and business transactions must be kept separate but it is the owners who will enter into any contract

Question 8

What legal entity rule is for a sole trader/partnership?

Answer 8

Personal and business transactions must be kept separate but it is the owners who will enter into any contract.
A sole trader and the business itself are considered one legal entity

Question 9

What legal entity rule is for a company?

Answer 9

Separate legal entity - the company itself can enter into contracts in its own right

Question 10

What liability is for a sole trader/partnership?

Answer 10

unlimited liability
the proprietor is personally responsible for debts of the business

Question 11

What liability is for a company?

Answer 11

limited liability
The shareholders liability is limited to the shares they have paid for
The company is responsible for its own debts.

Question 12

What is a director in a company?
What does a director do in a company?

Answer 12

A director is appointed by shareholders.
A director needs to manage the business of the company
A director:
- runs the business on a day-to-day basis
-enters into contracts in the Company’s name
–takes operational, tactical and strategical decisions

Question 13

What is a shareholder in a company?
What does a shareholder do in a company?

Answer 13

A shareholder does not take a part in day-to-day decision-making.
They have a right to insist that the directors call a general meeting.
They can vote on key decisions such as the appointment and removal of the directors or auditors

Question 14

What are the advantages of trading as a limited company?

Answer 14

1. limited liability status = the shareholders will not be held liable for the debts of the company. They will only lose the investment they have made in the company.
2. Easier to raise finances = limited company can have greater access to funding through the issuance of shares and other securities
3. Company continues to operate regardless of the ownership = if sole trader retires then the business ceases
4. taxed under corporation tax = sole traders are taxed under personal tax and therefore profits are subject to income tax and national insurance

Question 15

What are the disadvantages of trading as a limited company?

Answer 15

1. Company accounts are submitted at Companies House and anyone can access them. Accounts of sole traders or partnerships are not in the public domain whereas anyone can view accounts filed at Companies House.
2. More regulation to comply with (Companies Act 2006)
   This places restrictions on what the business can do and how it must be managed
   3.Accounts of larger companies must be audited and that is an additional cost for the business
   This has to be undertaken by an external Auditor
   Involves checking that the business is being run properly
   That the financial statements have been prepared accurately
3. Issue of shares is highly regulated, so although there is greater access to financing, it is heavily regulated.