Chapter 16

LIMITED LIABILITY COMPANIES (LLC)

LLC - General • A limited liability company is any company whose capital is broken

up into small amounts called shares or stock.

• Shares can then be sold widely to members of the public or to immediate friends. The major benefit of limited liability companies is its ability to attract large amounts of capital by spreading the risk of ownership.

• Limited companies are incorporated entities, i.e. they are legal "persons" and all have either Ltd. or Plc after their names, e.g... Republic Bank Ltd. or Barclays Bank Plc.

• Holders of shares are called shareholders and they are part owners of the business.

• In the event of a bankruptcy, shareholders will only lose the amount invested in the company and not their personal property. – limited liability.

LLC - General • Limited companies may be either:

private - shares cannot be sold to the public nor traded on the stock exchange). The sale of shares is limited to close friends and business partners

public - there are no restriction on the sales of shares. However, these companies take longer to form).

• Shareholders in public limited liability companies, although owners of the company, do not normally manage the company. Professional managers are generally hired.

• Shares are transferable, therefore limited liability companies have unlimited lives.

• A shareholder can benefit two ways from owing shares in a company: dividends; and appreciation in the market value of shares.

LLC - Formation Each limited company must have:

• Memorandum of Association - this give external information on the company e.g. name, registered offices, activities to be carried out, authorised share capital, corporate secretary; name of Bankers etc.

• Authorised share capital - The amount of capital that a company can issue/raise at par value, without needing permission from shareholders.

• Articles of Association - this give information on the internal operation of the company i.e. rights of shareholders and directors etc.

• Certificate of trading - for public limited liability companies.

Each share has three values:

• Par/nominal value - the face value. The minimum amount for which a share may be issued or sold;

• Issue value - the price of the share when it is issued (sold) to the public. The issue price of a share cannot be lower than the share’s par value;

• Market value - the selling price of the share on the stock exchange or among investors. The issuing company never receives any money when shares are sold by owners on the stock exchange via stockbrokers.

LLC – Shares

• Shares cannot be issued for less than their par values. However, shares of badly performing companies may have market values less than their par values. The company does not record this fall in value in its accounts.

• When shares are issued, they must be recorded at par value in the accounts of the company. Any excess over the par value is recorded in an account called share premium account.

LLC – Shares

LLC – Shares

DR Cr.

Cash (15,000 x $2.10) 31,500

Ordinary shares capital (15,000 x $1.00)

15,000

Share premium (15,000 x $1.10)

16,500

To record the issue of ordinary shares

Example: Saints Ltd. issued 15,000 $1 (par value) ordinary shares at $2.10 (issue price) per share. The journal entries to record this transaction are as follows (NB the journal entry are the same for preference shares):

LLC – SharesLimited companies may issue:

Preference shares - tend to have a fixed dividend percentage rate, e.g. 1000 10% preference shares at $1 each. Holders of these shares receive dividends and are paid in the event of bankruptcy, before other shareholders and normally have no voting rights. There are two types of preference shares, cumulative and non-cumulative. If there are no funds to pay a dividend to cumulative preference shareholders then this dividend will accumulate in the Balance sheet as a current liability until cash is available.

Ordinary shares – Dividends on these shares are paid after preference shareholders and tend to vary with profitability of the company. Holders of the share have voting rights as follows: 1 share 1 vote, the more shares that a person owns the great the power the company will have at General Meetings

LLC – Shares

A dividend is the share of net profit that a shareholder will receive. The share of net profit is determined, in the case of ordinary shareholders, by the management of the company and it will vary. Preference shareholders receive a fixed percentage.

Calculation of Dividends

Either number of shares issued × dividend per share

Or (number of shares issued × par value) Issued share capital × dividend %

LLC – Debentures

Debentures - are cash loaned to the company over the long term. Debentures are debts payable by the company. Debenture holders are long-term creditors (liabilities) and not owners of the company. Interest on debentures is a cost to the company for the use of borrowed funds and is an expense of the company. A floating or fixed charge also known as a lien is normally levied on the assets of the borrowing company as a form of collateral.

LLC – Debentures

Date Details folio Dr. $ Cr $

2008Jan 25

Cash 250 000

Debentures (long –term liability) 250 000

To record the issuing of debentures

Jan 25 2008,Farrel Ltd 50 000 15% debentures were issued at $5 each.

General Journal

LLC – Appropriation A/c

An appropriation account (statement of changes in owners’ equity) is prepared for all businesses in which there are more than one owner in order to show how much of the attained net profit is either:distributed among owners; orretained i.e. reinvested into the business

LLC – Appropriation a/c

Net Profit (for period)X

Less transfer to Reserves(these are amounts set aside for special purposes cf notes) (X)

X*Less Preference Dividend: Interim (Trial Balance) X Final (Notes) X

(X)

X**Less Ordinary Dividend: Interim (Trial Balance) X Final (Notes) X

(X)Retained profit for the period

XAdd retained earnings at start (c.f. Trial balance) XRetained Earnings at close (will be used in the Balance Sheet) X

Name of Co. Ltd. Profit and Loss Appropriation Alc for the period ended date

LLC – Balance Sheet

Capital and ReservesAuthorised share capital (a memo only)e.g. 150,000 ordinary share @ $1 each150,000 150,000 preference share @ $1 each 150,000

300,000Issued share capital (always recorded at par value)

Ordinary share 15,000Preference shares -ReservesShare premium account 5,000Redemption Reserve 4,000General Reserve 4,000Profit and Loss A/c or Retained Earnings 3,000

31,000

The asset and liability sections of the Balance Sheet remain the same; however the capital section only changes as follows:

ABC Balance Sheet extract as at date

LLC – Balance Sheet

RESERVES:

Capital Reserves

Share PremiumRevaluation

These reserves cannot be used for dividends.

Revenue Reserves

GeneralProfit & Loss A/cThese reserves are created by setting aside from annual net profit for any purpose decided by management. These reserves can be used for dividends, because they are forms of realised profits.