Lecture notes
The nature of limited companies and their financial statements
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- University Of Bath (UoB)
The nature of limited companies and their financial statement
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MN10668 lec 6The 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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