Limited company
Limited company — a legal entity with a separate identity from its shareholders, whose liability for the company's debts is limited.
Types
- Public limited company (plc) — may offer its shares to the public.
- Private limited company (ltd) — not allowed to offer its shares to the public.
| Advantages | Disadvantages |
|---|---|
| Limited liability. | Expensive to set up, with many legal formalities. |
| Easier to raise capital. | Profit is shared. |
| Accounts must be prepared. |
Key terms
- Limited liability — you can only lose what you have invested in the business.
- Equity — the total amount of money invested in the company by its shareholders.
- Issued share capital — the amount of capital issued to shareholders.
- Called-up share capital — the part of the issued share capital for which the company has asked shareholders for payment.
- Paid-up share capital — the part of the called-up share capital for which payment has been received.
The capital structure of a limited company consists of preference share capital, ordinary share capital, general reserve and retained earnings.
Share capital vs loan capital
| Feature | Preference shares | Ordinary shares | Debentures |
|---|---|---|---|
| Type | Share capital | Share capital | Loan capital |
| Voting rights | No | Yes | No |
| Return | Dividends paid before ordinary shareholders. | A share of the total funds provided by shareholders. | A long-term loan with a fixed rate of interest. |