|
Financial Accounting for Decision Makersfinancial-accounting-for-decision-makers-ninthnbsped-9781292251356-1292251352 compress21
Limited company
A
limited company
can range in size from quite small to very large. There is no limit on the
number of individuals who can subscribe capital and become the owners, which provides the
opportunity to create a very large-scale business. The liability of owners, however, is limited
(hence ‘limited’ company), which means that those individuals subscribing capital to the
company are liable only for debts incurred by the company up to the amount that they have
invested, or agreed to invest. This cap on the liability of the owners is designed to limit risk
and to produce greater confidence to invest. Without such limits on owner liability, it is diffi-
cult to see how a modern capitalist economy could operate. In many cases, the owners of a
limited company are not involved in the day-to-day running of the business and will, therefore,
invest in a business only if there is a clear limit set on the level of investment risk.
Note that this ‘limited liability’ does not apply to sole proprietors and partners. These indi-
viduals have a legal obligation to meet all of their business debts, if necessary using, what
they may have thought of as, private assets (for example, their private houses). The ability of
the owners of limited companies to limit their liability can often make this type of type of busi-
ness more attractive than either sole proprietorships or partnerships.
The benefit of limited liability, however, imposes certain obligations on such companies.
To start up a limited company, documents of incorporation must be prepared that set out,
among other things, the objectives of the business. Furthermore, a framework of regulations
exists that places obligations on limited companies concerning the way in which they con-
duct their affairs. Part of this regulatory framework requires annual financial reports to be
made available to owners and lenders and, usually, an annual general meeting of the owners
has to be held to approve the reports. In addition, a copy of the annual financial reports must
be lodged with the Registrar of Companies for public inspection. In this way, the financial
affairs of a limited company enter the public domain.
With the exception of small companies, there is also a requirement for the annual financial
reports to be subject to an audit. This involves an independent firm of accountants examining
the annual reports and underlying records to see whether the reports provide a true and fair
view of the financial health of the company and whether they comply with the relevant
accounting rules established by law and by accounting rule makers. Limited companies are
considered in more detail in Chapters 4 and 5.
All of the large household-name UK businesses (Marks and Spencer, Tesco, Shell, Sky,
Rolls-Royce, BT, easyJet and so on) are limited companies.
What are the main advantages of forming a partnership business rather than a limited
liability company? Try to think of at least three.
The main advantages are:
■
the ease of setting up the business;
■
the degree of flexibility concerning the way in which the business is conducted;
■
the degree of flexibility concerning restructuring and dissolution of the business; and
■
freedom from administrative burdens imposed by law (for example, the annual general
meeting and the need for an independent audit).
Activity 1.14
M01 Atrill's Financial Accounting For Decis 51257.indd 21
18/03/2019 10:29
|
|
|