Limited Liability Companies

ACCOUNTING FOR LIMITED LIABILITY COMPANIES

• identify the essential features of limited liability companies,

• identify the types of limited liability companies,

• outline the advantages and disadvantages of a limited liability company;

• describe the various methods of raising capital available to limited liability companies

• identify the various types of shares and the rights of the owners of each type of share;

ACCOUNTING FOR LIMITED LIABILITY COMPANIES

• prepare journal entries to record the issue of shares and debentures;

• calculate dividend payments for various types of shares;

• appropriate profits between dividends and reserves;

• *prepare the final accounts of limited liability companies

A limited liability company is an organisation owned by shareholders, whose liability is limited to its share capital.

Definition

Share capital refers to the funds that a company raises from selling shares to investors.

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​Share Capital

These are persons who contribute capital to the business. Therefore, shareholders own the company.

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Shareholders

This means that the losses that owners (shareholders) of a business may incur are limited to the amount of capital invested by them in the business and do not extend to their personal assets.

​Limited Liability

• Capital raised on the issue of shares

• Must have an audit and publish accounts

• Run by directors who are not necessarily the shareholders

• Directors are appointed by the shareholders

• Unlimited owership (shareholders)

• Limited liability

• Shareholders receive a dividend as their share of profit

• Risk is limited to the amount invested in shares

• Separate legal entity from its owners

​Documents Required

With the formation of limited liability company, certain documents have to be filed with the Registrar of Companies. Two main documents are:​

• Memorandum of Association – this document discloses the terms and conditions governing the company’s relationship with the outside world (e.g. name of company, location, amount of share capital, etc.)​

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​Documents Required

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• Articles of Association – discloses the terms and conditions governing the internal operations of the company (e.g. powers and duties of directors, holding of shareholder meetings, etc.)​

Advantages​

• Ease of raising capital​

• Limited liability of the shareholders​

• Transfer of ownership without affecting operations​

• Perpetual existence/continuity ensured​

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Disadvantages​

• Double taxation​

• Risk of takeover or Loss of Control​

The two main sources of finance for limited companies are:

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1. Shares - Shares are company-owned capital.

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2. Debentures ​- Debentures are the borrowed capital of the company

​Share Capital

When a company is formed, the maximum amount of shares that can be issued is referred to as the authorized share capital, whereas the amount of shares actually issued is referred to as the issued share capital.​

​Share Capital

​Types of Shares

The most common type of shares are 

1. ​Ordinary shares​

2. Preference shares

• Entitled to vote to elect the board of directors and to vote on important issues of the company.

• The rate of dividend paid is not fixed and has to be declared by the board of directors.

• Dividends are dependent on profits.

• Bear the most risk.

• Dividends are paid after payment has been made to preference shares 

​Ordinary Shareholders

• Not entitled to vote.

• Fixed rate of dividends.

• Dividend not dependent on profits.

• Bear little or no risk

• Dividends paid before ordinary shares.

​Preference Shareholders

​Share Capital continued

Martha Ltd. has a capital of $400,000 which comprises

• 400,000 shares at $1 per share or

• 200,000 shares at $2 per share​

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The value of each share ($1 and $2) is called the nominal or par value of the shares.​

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Nominal or par value - a monetary value attached to a share

If shares are issued at a price above the nominal value, the difference is called the share premium.​

Dividends

When a company makes a profit, the directors will have to decide how this is to be used. They will probably retain part of the profit as reserves, which will be used to expand the business. The remaining part is likely to be used to reward the shareholders for investing in the company. This share of the profits is known as the dividend. The dividend is usually shown as a percentage.