Summary
A limited company is a separate legal entity from its owners, providing limited liability protection to shareholders. It can own assets, enter contracts, and be sued independently.
- Limited Company — a business entity separate from its owners. Example: A company that can own property and enter contracts in its own name.
- Limited Liability — shareholders are only liable for company debts up to their investment. Example: If a company fails, shareholders lose only their investment, not personal assets.
- Ordinary Share Capital — funds raised by issuing ordinary shares, granting voting rights and variable dividends. Example: Shareholders can vote on company decisions and receive dividends based on profits.
- Preference Share Capital — funds from shares with fixed dividends and priority over ordinary shares. Example: Preference shareholders receive dividends before ordinary shareholders.
- Debentures — long-term loan capital with fixed interest, treated as a liability. Example: A company issues debentures to raise funds, promising to pay interest annually.
Exam Tips
Key Definitions to Remember
- Limited Company
- Limited Liability
- Ordinary Share Capital
- Preference Share Capital
- Debentures
Common Confusions
- Confusing ordinary shares with preference shares regarding voting rights and dividends.
- Mistaking share capital for loan capital in terms of ownership and repayment obligations.
Typical Exam Questions
- What is the main difference between share capital and loan capital? Share capital represents ownership; loan capital represents borrowing.
- Who gets paid first if a company is liquidated? Debenture holders.
- Which shareholders have voting rights at company meetings? Only ordinary shareholders.
What Examiners Usually Test
- Understanding of limited liability and its implications for shareholders.
- Differences between ordinary and preference shares.
- The role and characteristics of debentures in a company's capital structure.