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The nature of limited companies and their financial statements

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The nature of limited companies and their financial statement

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  • 2 april 2023
  • 7
  • 2021/2022
  • College aantekeningen
  • Unknown
  • Alle colleges
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MN10668 lec 6

The nature of limited companies and their financial statements

Unincorporated/bodies sole – sole traders and partnerships

Incorporated/bodies coporate – formed by either:
- Royal charted (e.g. ICAEW)
- Specific act of parliament (the BBC)
- General act of parliament (the companies act 2006)

The characteristics of companies limited by shares
 Separate legal entity
 Perpetual existence
 Liability of shareholders is limited to the nominal value of their equity shares
 Ownership is legally separate from the management
 Each share carries one vote
 Minimum 2 shareholders, no max

Classes of companies limited by shares

Public limited company (PLC)
1. Registered as such
2. Minimum authorised share capital of £50000

Private limited company (LTD)
 Not permitted to make public offer of shares for sale


The legal powers and duties of limited companies
 Memorandum of association
o Name and address
o Limit of liability
o Object/type of industry
o Authorised share capital (before 1 oct 2009
o Public or private company

Articles of association
 Sets out the rights of shareholders between themselves (e.g. regarding dividend
priorities), and the regulations relating to the issue of shares, borrowing powers,
meetings, appointment of directors, etc.
 Also, if required, authorised share capital

Company formation
 Certificate of incorporation – issued on incorporation (like a birth certificate)

,  Trading certificate – issued by the registrar when the company meets certain
regulations in respect of its capital structure – required before trading can
commence
 Preliminary/promotion/formation expenses – costs of forming a company


Sources of long-term capital
 Ordinary/equity shares
 Preference shares
 Debentures/loan stock
 All the shares and debentures/loan stock of UK companies have a fixed
nominal/face/par value (e.g. 10p, 25p, £1, £1000)

The characteristics of equity shares
 Shareholders are the owners of the company and are entitled to vote at general
meetings (e.g. to elect directors)
 Entitled to a dividend the amount of which is decided annually by the directors and is
an appropriation of profit
 Last to be repaid in the vent of liquidation
 Non-repayable (except on liquidation)
 Rights as specified in the articles of association
 Dividends are non-deductible from the company’s profit for tax purposes


The characteristics of preference shares
 No voting right
 Entitled to a fixed rate of dividend which has priority over the equity dividends and is
an appropriation of profits
 Repaid before the equity shareholders in the event of liquidation
 Non-repayable except on liquidation
 Rights as specified in the articles of association
 Dividends are non-deductible from the company’s profit for tax purposes
*depending on the type

Types of preference shares
 Non-cumulative – waived dividends are lost
 Cumulative – dividends not paid in the previous years are accrued and must be paid
before a dividend is paid to equity shareholders
 Redeemable – the company buys back the shares, typically at nominal value (shares
are reported as liability in the SOFP and dividend paid on redeemable preference
shares is recorded as expense in the income statement
 Participating – the holder has the right to receive a larger dividend if the company
does well

The characteristics of debentures/loan stock
 No voting rights

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