Limited Companies (Edexcel IGCSE Accounting)

Limited companies

What is a limited company?

• A limited company is a business owned by shareholders

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

  • Each share has a monetary value called nominal, face or par value

• Owners of a limited company have limited liability

  • This means the business is a separate legal entity from its shareholders, who are only liable for the amount they invest

    • If the company fails, shareholders only lose the share capital they have put into the business

• 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

What are the advantages of operating as a limited company?

• Limited companies can often raise more capital than sole traders or partnerships through the sale of shares

  • Lenders may also be more willing to lend to a company, as they are considered to less of a risk than unincorporated businesses

• 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 must fulfil more legal requirements than traders and partnerships

  • This includes carrying out regular audits and making their annual financial performance public

• It can cost more to set up and run a limited company than operating a sole trader or partnership business

  • Accounting and legal costs can be significant

What are the differences between private and public limited companies?

• The differences between private and public limited companies are summarised in the following table: