Chapter 16
LIMITED LIABILITY
COMPANIES (LLC)
LLC - General
•
A limited liability company is any company whose capital is broken up into
small amounts called shares or stock.
•
Shares can then be sold widely to members of the public or to immediate
friends. The major benefit of limited liability companies is its ability to attract
large amounts of capital by spreading the risk of ownership.
•
Limited companies are incorporated entities, i.e. they are legal "persons" and
all have either Ltd. or Plc after their names, e.g... Republic Bank Ltd. or
Barclays Bank Plc.
•
Holders of shares are called shareholders and they are part owners of the
business.
•
In the event of a bankruptcy, shareholders will only lose the amount invested
in the company and not their personal property. – limited liability.
LLC - General
•
Limited companies may be either:
private - shares cannot be sold to the public nor traded on the stock
exchange). The sale of shares is limited to close friends and business
partners
public - there are no restriction on the sales of shares. However, these
companies take longer to form).
•
Shareholders in public limited liability companies, although owners of the
company, do not normally manage the company. Professional managers are
generally hired.
•
Shares are transferable, therefore limited liability companies have unlimited
lives.
•
A shareholder can benefit two ways from owing shares in a company:
dividends; and appreciation in the market value of shares.
LLC - Formation
Each limited company must have:
• Memorandum of Association - this give external information on
the company e.g. name, registered offices, activities to be carried out,
authorised share capital, corporate secretary; name of Bankers etc.
• Authorised share capital - The amount of capital that a company
can issue/raise at par value, without needing permission from
shareholders.
• Articles of Association - this give information on the internal
operation of the company i.e. rights of shareholders and directors etc.
• Certificate of trading - for public limited liability companies.
LLC – Shares
Each share has three values:
• Par/nominal value - the face value. The minimum amount for which a
share may be issued or sold;
• Issue value - the price of the share when it is issued (sold) to the
public. The issue price of a share cannot be lower than the share’s
par value;
• Market value - the selling price of the share on the stock exchange or
among investors. The issuing company never receives any money
when shares are sold by owners on the stock exchange via
stockbrokers.
LLC – Shares
• Shares cannot be issued for less than their par values. However,
shares of badly performing companies may have market values less
than their par values. The company does not record this fall in value in
its accounts.
• When shares are issued, they must be recorded at par value in the
accounts of the company. Any excess over the par value is recorded in
an account called share premium account.
LLC – Shares
Example: Saints Ltd. issued 15,000 $1 (par value) ordinary shares at
$2.10 (issue price) per share. The journal entries to record this
transaction are as follows (NB the journal entry are the same for
preference shares):
DR
Cash (15,000 x $2.10)
Ordinary shares capital
(15,000 x $1.00)
Share premium
(15,000 x $1.10)
To record the issue of
ordinary shares
Cr.
31,500
15,000
16,500
LLC – Shares
Limited companies may issue:
Preference shares - tend to have a fixed dividend percentage
rate, e.g. 1000 10% preference shares at $1 each. Holders of
these shares receive dividends and are paid in the event of
bankruptcy, before other shareholders and normally have no voting
rights. There are two types of preference shares, cumulative and
non-cumulative. If there are no funds to pay a dividend to
cumulative preference shareholders then this dividend will
accumulate in the Balance sheet as a current liability until cash is
available.
Ordinary shares – Dividends on these shares are paid after
preference shareholders and tend to vary with profitability of the
company. Holders of the share have voting rights as follows: 1
share 1 vote, the more shares that a person owns the great the
power the company will have at General Meetings
LLC – Shares
A dividend is the share of net profit that a shareholder will receive. The
share of net profit is determined, in the case of ordinary shareholders, by
the management of the company and it will vary. Preference shareholders
receive a fixed percentage.
Calculation of Dividends
Either
number of shares issued × dividend per share
Or
(number of shares issued × par value) Issued share capital ×
dividend %
LLC – Debentures
Debentures - are cash loaned to the company over the long term.
Debentures are debts payable by the company. Debenture holders are
long-term creditors (liabilities) and not owners of the company.
Interest on debentures is a cost to the company for the use of borrowed
funds and is an expense of the company. A floating or fixed charge also
known as a lien is normally levied on the assets of the borrowing
company as a form of collateral.
LLC – Debentures
Jan 25 2008,Farrel Ltd 50 000 15% debentures were issued at $5 each.
General Journal
Date
Details
2008
Jan 25
Cash
Debentures (long –term liability)
To record the issuing of
debentures
folio
Dr. $
Cr $
250 000
250 000
LLC – Appropriation A/c
An appropriation account (statement of changes in owners’ equity) is
prepared for all businesses in which there are more than one owner in
order to show how much of the attained net profit is either:
distributed among owners; or
retained i.e. reinvested into the business
LLC – Appropriation a/c
Name of Co. Ltd. Profit and Loss Appropriation Alc
for the period ended date
Net Profit (for period)
X
Less transfer to Reserves
(these are amounts set aside for special purposes cf notes)
(X)
*Less Preference Dividend: Interim (Trial Balance)
Final (Notes)
X
X
X
(X)
**Less Ordinary Dividend: Interim (Trial Balance)
Final (Notes)
Retained profit for the period
X
X
X
(X)
X
Add retained earnings at start (c.f. Trial balance)
Retained Earnings at close (will be used in the Balance Sheet)
X
X
LLC – Balance Sheet
The asset and liability sections of the Balance Sheet remain the same; however the
capital section only changes as follows:
ABC Balance Sheet extract as at date
Capital and Reserves
Authorised share capital (a memo only)
e.g. 150,000 ordinary share @ $1 each
150,000 preference share @ $1 each
Issued share capital (always recorded at par value)
Ordinary share
Preference shares
Reserves
Share premium account
Redemption Reserve
General Reserve
Profit and Loss A/c or Retained Earnings
150,000
150,000
300,000
15,000
-
4,000
5,000
4,000
3,000
31,000
LLC – Balance Sheet
RESERVES:
Revenue Reserves
Capital Reserves
Share Premium
Revaluation
These reserves cannot be used
for dividends.
General
Profit & Loss A/c
These reserves are created by setting
aside from annual net profit for any
purpose decided by management. These
reserves can be used for dividends,
because they are forms of realised
profits.