J.

C Chandisingh Secondary School

Principles of Accounts

Limited Liability Company

A company is defined as an association of persons called shareholders who join together for a common
purpose.
OR
A limited liability company is an organization owned by its shareholders, whose liability is limited to its share
capital.

Other terms
Shareholders are the owners of the share capital of a limited company.
Directors are officials appointed by the shareholders to manage the company for them.
Share - the capital of a limited company is split into parts; one part is called a share.
Share premium is the difference been the nominal value of share and the price at which they are issued.
Nominal value is the face value of shares.
Dividend is a return a shareholder receives on his/her investment.

Companies are formed with the general purpose of generating profits. The operations of businesses are based
on the country’s regulations and legal terms of the Company Act. The owner of the company are its
shareholders.
The capital of the company is contributed by investors who buy the shares of the company. The operations of
the company are controlled under the direction of its Board of Directors. A company’s profit is distributed to
its shareholders in the form of dividends.
As a legal entity, a company can sue any individual and/or business and can be sued when certain legal issues
arise.
A shareholder liability is limited only to the extent of the capital to be paid by them.

Formation
When a company is formed, the following documents must be lodged with the Registrar of Companies:
- Memorandum of Association
- Article of Association
- Declaration of Compliance
Provisions for a Limited Liability Company
Membership Public Limited Companies must have a minimum of seven (7) shareholders,
while for a Private Limited Company the range is two (2) to fifty (50).
 Authorized Capital This can be increased only by a resolution in a General Meeting or decreased by
a special resolution agreed on by the Courts.
Management Only directors who are given management rights can act on behalf and make
contracts for the company. A private company may have one or more directors,
while a public company must have two or more directors.
Shares transfer The movement of shares is unrestricted in public companies, but restricted by
the Articles of Association in Private companies.
Accounts For public limited companies, a copy of the financial statement must be filed
with the Registrar of companies and publish in the official gazette. On the other
hand, the financial statement for is private limited company is not published in
the official gazette.
Profits/losses and reports The profits/losses and reports of a limited liability company must be audited.
Profit distribution Profit is distributed by the payment of dividends to shareholders.

Types of limited liability company

- Private. Shares are not traded on the stock exchange and the public cannot purchase shares. These
shares are usually purchased by family members and close friends.
- Public. Share are traded on the stock exchange and the public is bale to purchase share.
- Statutory. Owned by government.
Methods or raising capital
- The issue of shares
- The issue of debentures
Types of shares
- Preference shares
- Ordinary or equity shares
- Deferred shares
Ordinary shares – shareholders are entitled to dividends after the preference shareholders have been paid the
dividends.
Ordinary shares receive a variable rate of dividend dependent on the level of profit. The is no minimum or
maximum amount of dividend. Each share represents one vote at the annual general meeting.
Preference shares – these shareholders are entitled to a fixed rate of dividend before payment is made to the
other classes.
- Cumulative preference shares: these shareholders are entitled to an arrears of dividend from future
profits before other classes.
- Non-Cumulative preference shares: these shareholders are not entitled to arrears of dividends.
- Participating preference shares: these shareholders are entitled to a future share of profit, but only after
a specified rate of dividends is paid to ordinary shareholders.
Deferred shares – are usually owned by the founders of the company. The deferred shareholder will only get
their dividends after the preference shareholders and ordinary shareholders have been paid. They are paid a
certain rate of dividends, usually lower than the preference and ordinary shareholders.
Advantages
1. It is easier to raise share capital from a large number of investors.
2. Shareholders have limited liability for business debts.
 3. Uses specialized expertise of managers.
Disadvantages
1. Staring up is costly due to legal requirements needed.
2. Restricted by government regulation.
3. Shareholders are not involved in management.

Types of Share capital

1. Authorized share capital: this is the maximum amount of share capital that a limited company is
allowed to issue.
2. Issue share capital: is the amount of hare capital that the company has actually issued, this share capital
cannot exceed the authorized share capital

Calculating dividends on ordinary shares using a percentage

Example
A limited company has 100 000 ordinary shares of $1 each. A dividend is declared at 6%.
A shareholder with 1000 shares would receive a dividend of
6/100 * 1000 = ……………………

Calculating dividends on ordinary shares using a rate per share

Example
A limited company has 100 000 ordinary shares of $1 each. A dividend is declared at 8 cent per share
A shareholder with 1000 shares would receive a dividend of
 1000*$0.08= ………………………………………………

Calculating dividends on ordinary shares with a nominal value of less than $1

Example
A limited company has raised $200 000 from issuing ordinary shares with a nominal value of 50 cent each. A
dividend is declared of 2 cent per share.
 The number of issued shares is $200 000/0.50= ……………… shares

 The total dividend is 400 000*$0.02=……………………..