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MGT101 - Financial Accounting - I - Lecture Handout 36

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INTRODUCTION TO COMPANIES

Disadvantages of Partnership Firm

The Local Law restricts the number of partners in a partnership firm to twenty. If the firm needs more capital for its business, the partners may not be in a position to invest more money in the business.

Secondly, if the business of the partnership firm is very large and twenty persons can not manage it, they cannot admit new partners in the business. However, there is one exception. The partnership firm of professionals can have more than twenty partners.

At this point, need for forming a COMPANY arises.

Advantages of Limited Company

A Limited company enjoys the following benefits:

  • It can have more than twenty partners, so problem of extra capital is reduced to minimum.
  • The liabilities of the members of a company is limited to the extent of capital invested by them in the company
  • There are certain tax benefits to the company, which a partnership firm can not enjoy.
  • In Pakistan, affairs of limited companies are controlled by COMPANIES ORDINANCE issued in 1984.
  • The formation of a company and other matters related to companies are governed by SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN (SECP).

Types of Companies

There are two major types of the companies:

  • Private limited companies
  • Public limited companies

Private Limited Companies

Following are the main characteristics of private limited companies:

  • Number of members in a private limited company ranges from two to fifty.
  • Words and parentheses “(Private) Limited” are added at the end of the name of a private limited company. Example: ABC (Private) Limited.
  • Private limited company can not offer its shares to general public at large.
  • In case a shareholder decides to sell his shares, his shares are first offered to existing shareholders. If all existing shareholders decide not to purchase these shares, only then, an outsider can buy them.
  • The shareholders of the private limited company elect two members of the company as Directors.
  • These directors form a board of directors to run the affairs of the company.
  • The head of board of directors is called “chief executive”.

Public Limited Company

Following are the main characteristics of public limited companies:

  • Minimum number of members in a public limited company is seven
  • There is no restriction on the maximum number of members in a public limited company.
  • Word “Limited” is added at the end of the name of a public limited company. Example: ABC Limited.
  • Public limited company can offer its shares to general public at large.
  • The shareholders of the public limited company elect seven members of the company as Directors.
  • These directors form a board of directors to run the affairs of the company.
  • The head of board of directors is called “chief executive”.

There are two types of public limited company:

  • Listed Company
  • Non Listed Company

Listed Company

Listed company is that company whose shares are quoted on stock exchange. i.e. whose shares are traded in stock exchange. It is also called quoted company.

Non Listed Company

Non listed company is that company whose shares are not quoted on stock exchange. i.e. whose shares are not traded in stock exchange.

Formation of Company

In case of private limited company, any two members and in case of public limited company, any seven members can subscribe their names in Memorandum and Articles of association along with other requirements of the Companies Ordinance 1984; can apply to Security and Exchange Commission for registration of the company.

Memorandum of association:

Memorandum of association contains the following clauses:

  • Name of the company with the word “Limited” as the last word of the name, in case of public limited and the parenthesis and the word “(Private Limited)” as the last word of the name, in case of private limited company.
  • Place of registered office of the company.
  • Objective of the company.
  • Amount of share capital with which company proposes to be registered and division in to number of shares.
  • No subscriber of the company shall take less than one share.
  • Each subscriber of the memorandum shall write opposite to his name, the number of shares held by him.

Articles of Association

  • Article of association is a document that contains all the policies and other matters which are necessary to run the business of the company.
  • This is also signed by all the members of the company.

When Security and Exchange Commission is satisfied that all the requirements of the Companies Ordinance have been complied with, it issued certificate of incorporation to the company. This certificate is evidence that a separate legal entity has come in to existence.

Authorized Share Capital

The maximum amount with which a company gets registration/incorporation is called authorized share capital of that company.
This capital can be increased with the prior approval of security and exchange commission. This capital is further divided in to smaller denominations called shares. Each share usually has a face value equal to Rs. 10. According to Companies Ordinance, this face value can be increased but can not be decreased. The value of share written on its face is called face value or par value or nominal value

Issued Share Capital

When a company issues its shares to general public at large, the amount raised by the company with such an issue is called issued share capital. This is also called Paid up Share Capital.( total amount received by the company). Accounting entry is recorded for issued share capital; no such entry is recorded for authorized share capital.

Preliminary Expenses

All expenses incurred up to the stage of incorporation of the company are called Preliminary Expenses. All these expenses are incurred by subscribers of the company.

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