LIMITED LIABILITY COMPANIES

Introduction:

A limited company is a corporate body that possesses a ‘separate legal identity’ from
that of its shareholders. This means that a company is not seen as being exactly the
same as its shareholders. The owners of the company are called shareholders.
A company can sue one or more of its shareholders, and similarly, a shareholder can
sue the company. The capital of a limited company is divided into shares. Shares
can be of any nominal value – 25c, $1, $5, or any other amount per share. To
become a member of a limited company, or a shareholder, a person must buy one
or more of the shares.
If shareholders have paid in full for their shares, their liability is limited to what they
have already paid for those shares. If a company loses all its assets, all those
shareholders can lose are their shares. They do not pay anything more in respect of
the company’s debts and losses.

Public and Private companies:

There are two classes of companies, the public company and the private
company. The minimum membership of a public company is two and there is no
maximum. Its name must end with the words ‘public limited company’ or the
abbreviation ‘plc’.

Directors of the company:

The possession of a share normally confers voting rights on the holder, who is then
able to attend the general meetings of the company. At one of these general
meetings, normally the Annual General Meeting or AGM, the shareholders vote for
directors, these being the people who will be entrusted with the running of the
business.

Types of shares:

There are two main types of shares:

1 Preference shares. Holders of these shares get an agreed percentage rate of

dividend before the ordinary shareholders receive anything. Preference shares are
either cumulative or non-cumulative.
2 Ordinary shares. Holders of these shares receive the remainder of the total profits
available for dividends. There is no upper limit to the amounts of dividends they can
receive.

Share Capital of a Company:

The term ‘share capital’ can have any of the following meanings:

1 Authorised share capital. Sometimes known as registered capital or nominal

capital. This is the total of the share capital which the company is allowed to issue to
shareholders.
2 Issued share capital. This is the total of the share capital actually issued to
shareholders.
3 Called-up share capital. Where only part of the amount payable on each issued
share has been asked for, the total amount asked for on all the issued shares is
known as the called-up capital.
4 Uncalled share capital. This is the total amount which is to be received in future
relating to issued share capital, but which has not yet been asked or called for.
5 Calls in arrears. The total amount for which payment has been asked for (i.e.
‘called for’), but has not yet been paid by shareholders.
6 Paid-up share capital. This is the total of the amount of share capital which has
been paid for by shareholders.

Dividends:

Shareholders of a limited company obtain their reward in the form of a share of the
profits, known as a dividend. The dividend is usually expressed as a percentage. A
dividend of 10 per cent on 500,000 ordinary shares of $0.50 each will amount to
$25,000. A dividend of 5 cents per share will amount to $25,000.

Debentures:

The term debenture is used when a limited company receives money on loan, and
certificates called debenture certificates are issued to the lender. Interest will be paid
to the holder, the rate of interest being shown on the certificate. They are not always
called debentures; they are often known as loan stock, loan capital or loan notes.
Debenture interest has to be paid whether profits are made or not. They are,
therefore, different from shares, where dividends depend on profits being made.
A debenture, like preference shares, may be either:

 Redeemable, i.e. repayable at or by a particular date, or

 Irredeemable, normally repayable only when the company is officially
terminated by its going into liquidation. (Also sometimes referred to as
‘perpetual’ debentures.)

Some debentures are ‘secured’ against specific assets. The term ‘mortgage’
debenture is sometimes used instead of ‘secured.

Share Capital/Equity

Capital and reserves

Ordinary share capital (issued and called up) XXX
Share premium account XXX
Other reserves
General reserve XXX
Profit and loss/Retained Earnings XXX
Equity XXX
EXAMPLE

QUESTION 45.11A

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30/04/20X5

Sales     880426
Less Returns Inwards     18400
Net Sales/Turnover     862026
Less: Cost of Sales      
Opening Stock   102994  
+ Purchases   419211  
  522205  
+ Carriage Inwards   1452  
  523657  
- Closing Stock   111317  
Cost of Sales     412340
Gross Profit     449686
Other Income     0
TOTAL INCOME     449686
Less EXPENSES      
Debenture Interest 1600    
Debenture Interest Owing 1600    
  3200  
Wages & Salaries   123289  
Rent, Rates, Insurance 16240    
Accrued Rent 802    
  17042  
Discount Allowed   3415  
Directors Remuneration 82400    
Directors Remuneration Owing 6000    
  88400  
Depreciation of Equipment   45000  
Depreciation of Vehicles   14300  
TOTAL EXPENSES     294646
Net Profit     155040
     

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30/04/20X5

  Ordinary Retained General Replace- TOTAL
Share
  Earnings Reserves Reserve  
Capital
  $ $ $ $ $
Opening Balances b/d 150000 12411 15000 30000 207411
Net Profit for the year   155040     155040
Transfer to general reserve   -5000 5000   0
Transfer to replace' reserve   -10000   10000 0
Preference dividend   -6000     -6000
Ordinary dividend   -27000     -27000
Closing Balances c/f 150000 119451 20000 40000 329451
           

NOTES FOR THE YEAR ENDED 30/04/20X5

PROPERTY, PLANT & EQUIPMENT SCHEDULE
  Equip' Motor TOTAL
  Ment Vehicles  
Cost $ $ $
Opening Balances   225000 57200 282200
Additions/Disposals   0 0 0
Closing Balances   225000 57200 282200
     
Depreciation      
Opening Balances   32600 18200 50800
Additions/Disposals   0 0 0
Charge during the year   45000 14300 59300
Closing Balances   77600 32500 110100
     
Net Book Values   147400 24700 172100

STATEMENT OF FINANCIAL POSITION AS AT 30/04/20X5

NON CURRENT ASSETS $ $ $
Non Current Assets   172100
   
CURRENT ASSETS    
Stock   111317  
Debtors   227219  
Bank   4973  
Cash   62  
  343571  
Less: CURRENT LIABILITIES    
Creditors 54818  
Accrued Rent 802  
Accrued Debenture Interest 1600  
Accrued Remuneration 6000  
Preference Dividend 6000  
Ordinary Dividend 27000  
  96220  
Working Capital   247351
  419451
NON CURRENT LIABILITIES    
8% Debentures   (40000)
NET ASSETS   379451
   
EQUITY & RESERVES    
Ordinary Share Capital   150000
Retained Earnings   119451
General Reserve   20000
Fixed Replacement Reserve   40000
  329451
Preference Share Capital   50000
CAPITAL EMPLOYED   379451