Classwork Series and Exercises {Financial Accounting – SS1}: Company’s Account

Financial Accounting, SS 1, Week 5

Topic: Company’s Account

Contents

• Meaning of company’s Account
• Kinds of companies
• Characteristics of limited companies

Company

A company can be defined as a business owned by an association of people and operated as a legal person on behalf of its owners with the usual motive of profit maximization.e.g nestle plc, cabdury plc etc.

Kinds of Companies

There are three kinds of companies which may be constituted or incorporated under the companies act.

1. Unlimited companies:in an unlimited company,the liability of the members for the debit of the company is unlimited.
2. Company limited by share:this is a company whose liabilities is limited to the amount invested in the business.
3. Company limited by guarantee: these are companies whose liabilities is limited to the amount guaranteed by the members in the event of liquidation e.g clubs.

Characteristics of limited companies

1. Legal entity: a company as an artificial person can sue and be sued.it is personally distinct from its owners.
2. Limited liability: the liabilities of members is limited to the amount invested in the business.
3. Perpetual existence: the ownership of a company can change without changing the company
4. It is authorized by law to carry on a specific line of business.

Types of Limited companies

Limited liability companies that have profit as their motive of operation are of two types,namely;private and public.

Private companies

A private company is defined by section 28 of the company act 1948 as a company which by its articles;

1. Restricts the right to transfer
2. Limit the number of its member to fifty.
3. Prohibits any invitation to the public to subscribe to its shares
4. The private company end their names with the word “limited”

Public companies

These are companies which invite the public to subscribe to its shares,the minimum number of shareholders required to form a public limited company is seven. There is no restriction on the maximum number of shareholders.the name of the company end with “PLC”

Characteristics of Public Companies

A key characteristic of public companies is their limited liability status.

Limited liability means that the business’s owners — its shareholders — aren’t responsible over a set amount for their investment in the company.

This means that if a public company is sued, the parties bringing the suit bring it against the company, not against its investors or shareholders.

In other words, a shareholder isn’t personally responsible for the debts of the company in any amount over the value of the shareholder’s investment. This is in contrast to sole proprietorships or basic business partnerships, in which the business owners and investors are liable for the debts of the business. While limited liability does offer protection to the shareholders of a public company, the shareholders are still responsible for their own illegal actions. For instance, if an investor of a company embezzles money, she will be legally responsible for this, and criminal or civil action could be brought against her personally, not against the company.

Test and Exercise

1. Define Company
2. Give the characteristics of  public companies
3. List the characteristic of limited companies

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