Solution 14.1

A private limited company is a corporate body, which has a legal existence quite separate from the owners (between two and fifty shareholders) that have restrictions on the transfer of their share, but are protected by limited liability.  A public limited company is a corporate body, which has a legal existence quite separate from the owners (minimum of seven shareholders) that are protected by limited liability.  Shares are freely transferable as they can be traded publicly and are quoted on a stock exchange.

A person invests or buys ownership of a company by purchasing shares in that business. The term debenture is used when a company seeks people or other companies to lend it money. Debentures are a fixed interest loan which can be secured against the assets of the company.  A share relates to ownership of a company while a denture relates to a loan to a company with no ownership rights.

Holders of ordinary shares are the real owners of the business as each share carries voting rights and a right to a share of the profits of the business. Ordinary shareholders receive the remainder of the total profits available for dividend and, in the case of liquidation, are the last to receive any payments of cash and as a result will generally receive no repayment of capital.  Holders of preference shares get an agreed, fixed rate of dividend each year. This dividend is paid before any ordinary share dividends are paid. Preference shareholders generally take less risk than ordinary shareholders and thus are not considered the real owners of the business and do not vote on company resolutions such as the appointment of directors etc. In the case of the company going into liquidation they will be repaid their investment before the ordinary shareholders are paid, if there are any monies left in the company.

Capital reserves are reserves that are not available for distribution in the form of dividend to shareholders. Example of capital reserves would be a share premium reserve and a fixed asset revaluation reserve.  Revenue reserves consist of unused profits remaining in the appropriation accounts (retained profits) or any amounts that have been transferred to a reserve account from the appropriation account

A shareholder’s reward for investing in the company comes in the form of a dividend. A dividend is a share of the profits made by the company.  An interim dividend is a payment out of profits before the year end while a final dividend represents the payment out of profits proposed by the directors of a company at the AGM.