Business Structures: Ltd, PLC and Sole Trader

Name is followed by 'Ltd' (short for 'Limited'), hare issue is restricted to family and friends, Shares cannot be listed or traded on the stock market

Name is followed by plc (short for 'Public Limited Company'), Can raise finance by selling shares to the general public, Shares can be listed and traded on the stock market

own limited companies but appoint paid directors to run the company on their behalf. Shareholders' interests are protected by a number of laws to ensure that they do not lose out financially.

a company has a separate legal entity to its shareholders: it can suee sued and the company (not its owners) pays Corporation Tax ,a company has continuity it has a separate existence to its owners,the shareholders in a company benefit from limited liability.

An income statement , A statement of financial position, A statement of changes in equity (Topic 21)

Directors are legally employees of the company, appointed by the shareholders to run the company on their behalf. The income they received from the company is therefore an expense of running the business and an administration expense in the income statement covers all the financial benefits the directors receive from the company, whether in the form of money, e.g. salary, bonus, or fees, or 'benefits-in-kind', such as company cars.

There is a legal requirement that the financial statements of limited companies are audited. An auditor is an independent expert, usually a financial accountant who does not work for the company and checks the figures prepared by the company's accountants to ensure that they have been prepared correctly and prepares an Auditors' Report to confirm that the financial statements represent a 'true and fair view' of the company's financial situation.This is to protect the shareholders' interests due to the divorce between ownership (shareholders) and control (directors)

The Profit for the year before tax is usually lower than the Profit from Operations because the company has to pay interest on loans and preference dividends which are expenses in the income statement similar to sole traders.

is equivalent to profit for the year for a sole trader - it is Gross Profit + Income - Expenses. A sole trader is entitled to all of this profit which is then transferred to the Capital Account on the Balance Sheet. This is not the case for companies, and their income statement does not end at this point.

Companies are separate legal entities and pay Corporation tax in their own right.

On a company statement of financial position the equity section shows how much the company is worth to its shareholders, namely the assets minus the liabilities.

A company raises share capital through the issue of shares in exchange for money to enable it to buy assets shareholders may then receive an annual share of the profit for the year, known as a dividend. The most common type of shares are Ordinary shares (also known as 'Equity shares') the annual dividend can vary and is recommended by the company directors the annual dividend goes in the Statement of Changes in Equity

A companys sofp will show authorised share capital for information purposes but the figures to be included in the balance sheet totals are the issued share capital. When the company is first formed its equity will consist of just share capital as there will be no reserves.

known as 'face value' and 'par value' it is the value at which the shares are placed in the ledger accounts and on the balance sheet, It is not necessarily the price at which the shares were sold ,this is the issue price or what they are worth ,this is the market price

this document confirms that the business will operate as a company and will issue shares,It contains information of interest to external parties such as the company's line of business, its name and registered office ,its authorised share capital (though no longer a requirement since 2009

this document contains the rules that govern the internal running of the company such as the conduct of directors meetings and voting rights of the shareholders at meetings.

is shown in the Memorandum of Association and is the maximum amount the company can raise through the issue of shares. The authorised share capital can be subsequently increased if the company grows, subject to a majority vote of the ordinary shareholders. It can only be reduced following a court ruling.

the number of shares actually issued, which cannot exceed the authorised share capital. This enables the company to issue more shares at a later date, for example if it needs to raise more finance.

basically means the same as 'issued share capital' and is the amount of share capital that the shareholders have paid for.

Shareholders in a limited company may be entitled to an annual share of the profit for the year known as a dividend.Only dividends actually paid during the accounting period are included in the financial statements. This means that any proposed final dividend for the year in question is not recorded.

The ordinary share dividend is a variable amount and is recommended by the directors based on:the level of profit made in the year ,how much profit the directors wish to retain the company's revenue reserves ,how much the company can afford to pay (i.e. bank balance or overdraft facility)

When a company first starts trading its equity consists simply of share capital, however over time the company becomes worth more to its shareholders, for example as it makes profits.Increases in the worth of the company over and above its share capital are known as 'reserves'. Reserves are not cash or money in the bank, so they are not money available to spend.Reserves change the equity of a company, so before the equity section of the Statement of Financial Position can be completed it is necessary to prepare an additional financial statement, called the statement of changes in equity.

which occur due to the normal trading activities of the company which are calculated in the Income Statement and enable the company to have retained earnings (profits)

which occur due to transactions which are not part of the company's normal trading activities and which affect the Statement of Financial Position

explains how the equity section of the statement of financial position has changed from the beginning of the financial year to the end.

Sole traders take drawings, but are likely to retain some profits in the business. Similarly, the directors of a limited company may decide that some of the profits after tax should not be paid as dividends but should be retained by the company as Revenue Reserves by adding to Retained Earnings

the final dividend for the previous year + the interim dividend for the current year.

is used to 'balance' the increase in the value of non current assets. Each time land is revalued, the revaluation reserve changes and so revaluation is a change in equity and must be included in the statement of changes in equity.

by issuing more ordinary shares,the shares are offered to existing shareholders,in proportion to the number of shares already held /on a pro rata basis

when a company issues FREE shares to existing shareholders and no payment is made for the shares,no money is received by the bank so no change in the 'Net Assets' section of the Statement of Financial Position

The main reason bonus shares are issued is because the directors of a company feel that the ordinary share capital does not adequately reflect the net asset base of the company.

Additional shares are given free to existing shareholders, The capitalisation of reserves into share capital, Issued to restructure the Statement of Financial Position, Total equity remains the same, (Capital) Reserves go down, Stock market price of shares will fall in proportion to bonus issue, Distributed in proportion to existing shareholding, Control of the company does not change

Additional shares offered for sale to existing shareholders, Shares have to be paid for, Issued to raise finance - Company receives payment from shares sold, Issued to raise finance - Company receives payment from shares sold, Shareholders can either buy additional shares or sell the rights on the stock market, Total equity increases, Share premium reserves go up, Offer price is below market value so Stock market price may fall, Distributed in proportion to existing shareholding,Control of the company does not change

Rights issues are a good way for companies to raise finance,There is no interest to pay, unlike finance through borrowing, reducing the risks of high gearing ,It is less expensive to write to existing shareholders offering shares for sale than to advertise to the general public, known as a 'full dress issue', the cost of which can run into millions.,Existing shareholders are more likely to want to buy shares than the 'general public'. If the company advertised shares to the general public there is less guarantee that the shares will sell for the desired price,there is no change in ownership, the existing ordinary shareholders hold more shares but each shareholder's percentage of issued share capital remains the same.Control of the company does not change because the shares are offered on a pro-rata basis, namely on the basis of the existing shareholding, so if a person owned 5% of the old shares they will still own 5% of the new shares,Rights issues are also of benefit to the shareholders since they are offered at a lower price than the current market price of the shares to encourage the shareholders to take up their 'right' to buy.