5.3 Limited Companies

2026 Syllabus Objectives

By the end of this topic, you should be able to:

  1. Explain the advantages and disadvantages of operating as a limited company
  2. Understand the meaning of the term limited liability
  3. Understand the meaning of the term equity
  4. Understand the capital structure of a limited company: preference share capital, ordinary share capital, general reserve, and retained earnings
  5. Understand and distinguish between issued, called-up, and paid-up share capital
  6. Understand and distinguish between share capital (preference shares and ordinary shares) and loan capital (debentures)
  7. Prepare income statements, statements of changes in equity, and statements of financial position
  8. Make adjustments to financial statements (as in sole traders — prepayments, accruals, depreciation, provision for doubtful debts, etc.)
  9. Understand the difference between redeemable and non-redeemable preference shares (Note: You do NOT need to know cumulative/non-cumulative preference shares, rights issues, share premium, or capital redemption reserve.)

1. What is a Limited Company?

https://cambridgeassistant.com

A limited company is a type of business that is legally treated as a separate person from its owners. This is called being an incorporated business — it means the business has its own legal identity. It can own property, sign contracts, and take on debts in its own name.

The owners of a limited company are called shareholders. They own the company by buying shares — think of a share as a small piece of ownership in the business. If a company is divided into 1,000 shares and you own 100 of them, you own 10% of that company.

Because the company is run by many shareholders, a board of directors is appointed to manage the day-to-day running of the business.

Types of Limited Companies

There are two main types:

  • Private Limited Company (Ltd): Shares are not sold to the general public. They are only sold to family, friends, or selected investors. These tend to be smaller businesses.
  • Public Limited Company (PLC): Shares are sold openly on a stock exchange (a marketplace where shares are bought and sold). Anyone can buy shares. These tend to be large businesses.

Sign in to view full notes