Limited Companies (Cambridge International IGCSE Accounting)

Limited companies

What is a limited company?

• A limited company is a business owned by a group of people

• The ownership of the company is divided into parts known as shares

  • The people who buy the shares are known as the shareholders
  • Each share has a monetary value called nominal, face or par value

• A limited company can be private (Ltd) or public (PLC)

  • Anyone can buy shares in a public limited company
  • Shares in a private limited company are not sold publicly

• Owners of a limited company have limited liability

  • This means the business is a separate entity

  • The owners are only liable for the amount they invest

    • If the company goes bust then they only lose the amount invested

• The reward the shareholder receives for investing their money in the limited company is called a dividend

  • Dividends are paid from the profits the company makes

  • Dividends are paid as a proportion of the face value of the shares owned by the shareholder

    • Dividend paid = number of shares × dividend per share

What are the advantages of operating as a limited company?

• The owners of a limited company can usually generate more capital than sole traders or partnerships
• The owners of a limited company have limited liability whereas sole traders and partnerships have unlimited liability

What are the disadvantages of operating as a limited company?

• Limited companies come with more legal requirements than traders and partnerships such as audits and making financial statements public
• It can cost more to set up a limited company than the costs of setting up a sole trader business or partnership