Week 3 – Finance and Accounting
Chapter 4 - Accounting for limited companies (1)
- Most businesses are limited companies
- Account for the majority of business activity and employment
The main features of limited companies
Legal nature
- Limited company = artificial person that has been created by law (separate legal
entity)
- Company has many rights and obligations that ‘real’ people have e.g. enter contracts
in its own name; sue people
- All UK companies are created (or incorporated) by registration; promoters (= people
wishing to create a company) fill in forms and pay registration fee (~100 pounds)
- Company’s name is added to the ‘Registrar of Companies’
- Owners = shareholders
- Ownership is normally divided into a number of shares
- Legal separateness of limited company and its shareholders leads to two important
features: perpetual life and limited liability
Perpetual life
- Perpetual existence = company will continue even where an owner of some, or even
all, of the shares in the company dies
- Shares simply pass to the beneficiary of his/her estate
- Company is unaffected by changes of ownership
- Shareholders or courts may bring the company’s existence to an end
o Assets are sold to generate cash to meet outstanding liabilities; remainders
are distributed to shareholders
o Voluntary liquidation = shareholders agree to end the life due to e.g.
achieved purpose
o Ended by courts when creditors have applied for it
Limited liability
- Company is responsible for its own debts and losses
- Shareholders limit their losses to the amount that they have paid for their shares
- Advantage for providers of equity finance, but not for all other stakeholders e.g.
creditors, suppliers
o Smaller, and less established firms have difficulties to convince suppliers
Chapter 4 - Accounting for limited companies (1)
- Most businesses are limited companies
- Account for the majority of business activity and employment
The main features of limited companies
Legal nature
- Limited company = artificial person that has been created by law (separate legal
entity)
- Company has many rights and obligations that ‘real’ people have e.g. enter contracts
in its own name; sue people
- All UK companies are created (or incorporated) by registration; promoters (= people
wishing to create a company) fill in forms and pay registration fee (~100 pounds)
- Company’s name is added to the ‘Registrar of Companies’
- Owners = shareholders
- Ownership is normally divided into a number of shares
- Legal separateness of limited company and its shareholders leads to two important
features: perpetual life and limited liability
Perpetual life
- Perpetual existence = company will continue even where an owner of some, or even
all, of the shares in the company dies
- Shares simply pass to the beneficiary of his/her estate
- Company is unaffected by changes of ownership
- Shareholders or courts may bring the company’s existence to an end
o Assets are sold to generate cash to meet outstanding liabilities; remainders
are distributed to shareholders
o Voluntary liquidation = shareholders agree to end the life due to e.g.
achieved purpose
o Ended by courts when creditors have applied for it
Limited liability
- Company is responsible for its own debts and losses
- Shareholders limit their losses to the amount that they have paid for their shares
- Advantage for providers of equity finance, but not for all other stakeholders e.g.
creditors, suppliers
o Smaller, and less established firms have difficulties to convince suppliers
