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Summary LIMITED LIABILITY COMPANIES INTRODUCTION AND BASIC CONCEPTS
- Course
- Accounting
- Institution
- 12
LIMITED LIABILITY COMPANIES INTRODUCTION AND BASIC CONCEPTS summarized in detail
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Grade 12 Theory Notes: Limited Liability and Bookkeeping accountsLIMITED LIABILITY COMPANIES
INTRODUCTION AND BASIC CONCEPTS
Sole Trader and partnership – the owner/partners contribute to the capital and running/management
of the business. Any business done is carried out in the personal capacities of the owners or partners.
In the case of a partnership, the partners are sued in their own names and are jointly and severally
liable for the debts of the partnership. The sole trader faces the same situation.
Company – the owners are called shareholders and they contribute to the capital but are not all
necessarily involved in the management of the business. This role is handed over to the Directors of
a company who may have shares and own a part of the business but their main responsibility is to
run the business.
The Company as a form of a Business Enterprise
A company is established as a separate legal entity and has a legal personality of its own.
Separate legal entity – is an officially authorized body which can act independently
Legal personality – legally regarded as a person who is able to:
- enter into contracts in its own name
- institute legal proceedings in its own name
- sue and be sued
Since a company is seen as a person it needs to have “real people” to act on its behalf. This role is
given to Directors who run the business on behalf of the company. The Directors are seen as the
eyes, ears, arms, legs and brain of the company. The Directors do not, therefore, act in their personal
capacities but rather in the name of the business. They must always act in the best interest of the
business and in the best interest of the shareholders.
Limited Liability
The company and the shareholders are distinctly separate from each other. Both are seen as
separate legal entities. The shareholder contributes a certain amount of capital to the company and
it is this amount that will be lost by them should the company become insolvent. Therefore, we say
that the liability of the shareholders is limited to the amount paid by them for their shares in the
,Grade 12 Theory Notes: Limited Liability and Bookkeeping accounts
company. In this way the concept offers protection to shareholders and plays a role in stimulating
investment in businesses in a country.
The name of the company must end in Limited or Ltd which will make anyone dealing with the
company aware that limited liability applies and that they will only be able to recover amounts owed to
them from the company with no recourse to the shareholders.
The legal personality of companies vs. partnerships and sole traders:
Company Partnership Sole trader
Period of existence not determined by Partnership dissolves upon Sole Trader ceases to
death or departure of shareholder. the death or departure of a exist when the owner
Company remains in existence until a partner. dies or if he decides to no
decision is taken to stop trading as a longer trade as a
business. business.
Assets acquired are in own name and for Partners are joint owners of The assets of the Sole
exclusive use of company. Shareholders the assets in the Trader are the assets of
will share proceeds from sale of assets in Partnership. the owner.
the event of liquidation of the company.
The company and the shareholders are The partners are jointly and The sole proprietor is
both separate legal entities which means severally liable for all the solely responsible for all
that the debts of the company are not the debts of the partnership. the debts of this form of
debts of the shareholders. This means that all of the business.
partners will have to come
up with funds to settle the
debts of the partnership.
Has independent contractual liability which Partners act in personal Owner of a Sole Trader
means that the Directors, on behalf of the capacity for the business enters into
business, enter into agreements with other Partnership. business agreements in
legal bodies. It is only the Directors who his personal capacity.
manage the business that can enter into
such legal contracts and business
agreements and not the shareholders who
, Grade 12 Theory Notes: Limited Liability and Bookkeeping accounts
own the business. There is complete
separation of control of the running of the
business by the Directors and ownership by
the shareholders.
The profit or loss a company makes belong Partners receive their share Owner pays tax in his
to the company and not the shareholders. of the profit and then pay personal name on any
Profits are shared in the form of dividends tax in their personal profit earner in the
paid to shareholders in proportion to the capacities. business.
number of shares they own. Company pays
dividends to shareholders after paying
Income Tax.
When it is decided to form a company, a Name of Partnership does The Sole Trader does not
suitable name is agreed on and this name not end in LTD and is not register the name of his
must be registered with the Registrar of required to be registered. business.
Companies. The name must end in Limited
or Ltd.
Statutory Control
The management of a company is held in the hands of a Director or Directors. The privilege of
company’s being a separate legal personality and having limited liability could be open for abuse if
there are no controls to prevent misconduct by the people who are put in charge of running a
company.
Of paramount importance is the protection of the shareholders interest in a company. The
shareholders should be provided with adequate and reliable information on how their funds have
been utilized by the Directors. The limited liability concept can also be an open invitation to Directors
to act in a negligent or fraudulent manner when dealing with other businesses or individuals as they
know their personal assets are protected.
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