Introduction to Limited Liability Companies

What is a limited liability company

• A legal entity which is formed by registration under the companies act.
• It is a form of business owned by all who invest in it.
• The investors are called shareholders.
• The capital of the company is divided into units called shares.
• The shareholders appoint directors to run the company on their behalf
• Any profit made can be paid to shareholders as dividend
• If a company is in trouble all that the shareholder will lose are the shares that they have bought in
the company.
Characteristics of Companies
A company is said to have a separate legal entity.
• It is separate from the people who own it; it is legally different from shareholders.
• It can be sued or sue just like a person.
• Its existence can be terminated by using proper legal procedure.
• A limited liability company should have at least two ordinary shareholders
The company’s law and company’s act of the country govern the formation of a company.
Limited Liability companies are the most common form of business organizations.
Classes of companies
There are two main classes of limited liability companies;
a) Public Companies,
b) Private companies
A public company fulfils the following:
1) It must have at least seven shareholders
2) Can offer its shares to the general public
3) Can trade its shares on the stock exchange
4) The shares that are dealt in on the stock exchange are all of public limited companies.
Companies, which trade their shares on the stock exchange, are called quoted companies,
this does not mean that all public companies are traded on the stock exchange
A private company fulfils the following:
1) It may not have less than two or more than fifty shareholders
2) It may not offer its shares to the general public. Once someone has purchased shares in a
private company the right to transfer those shares to someone else is restricted.
3) A private company is usually but not always smaller than a public company.
The formation of limited liability companies
A company is formed by sending the following documents to the registrar of companies:
1. Memorandum of agreement- which state the name of the company, address of the company’s
registered office, objects of the company, authorised capital, whether public or private company
etc.
2. Articles of association- a rule book which contains regulations relating to the issue of shares,
conduct of meetings, appointment of directors etc.

Shareholders - are not involved in the day to day running of the company; this task is carried out by
directors. Shareholders vote for directors at the AGM.
Dividend
• This is the return/share of profit that shareholders get from their investment.
• Directors can propose that a dividend be paid based on the amount of profit made.

Nature and type of shares

The main classes of shares are:

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 a) Preference shares- Preference shareholders get an agreed percentage of dividends before the
ordinary shareholders receive theirs.
b) Ordinary shares-Holders of ordinary shares receive the remainder of the dividend; there is no
upper limit to the amount of dividend they can receive. Ordinary shareholders also have voting
rights. Ordinary share capital is also known as equity share capital

There are two types of preference shares. These are:

a) Cumulative preference – When profit for any given year is insufficient to pay for the preference
share dividend, the dividend that is not paid is carried forward and should be paid when profit is
available.
b) Non-Cumulative preference Shares. Do not receive arrears of dividends.

NB If a company is unable to pay the dividend due on preference shares, whether cumulative or
non cumulative, then it cannot pay dividend on ordinary shares.
What is Share Capital
Share capital can mean any of the following:
a) Authorized share capital: also known as registered or nominal capital. This is the total share
capital that a company is allowed to issue to shareholders
b) Issued capital: this is the capital that is actually issued to shareholders or it is the actual amount
raised from shareholders
c) Called up capital: Where only part of the amount payable on each share has been asked for. If
shares are paid in instalments; the instalments that are due are called ‘called up capital’.
d) Uncalled up capital: The total amount, which is to be received in future, that is future
instalments which have not yet been asked for.
e) Paid up capital: this is the total amount of share capital which has been paid for by
shareholders

Bonus Shares
These are shares that are issued to existing shareholders. They are free shares and no cash is paid for them
by shareholders instead reserves are used to pay for them.
Share Premium
When shares are sold at a price above their nominal value, they are being sold at a premium. The
difference between the nominal value and the selling price is described as share premium. This amount is
credited to a share premium account.
Debenture
 A debenture is a loan to a company which carry a fixed interest. The company will issue
debenture certificate to the lender. Interest is paid whether the company has made profit or not.
 A debenture may be redeemable that is repayable at or after a particular date or Irredeemable
normally repayable only when the company is officially liquidated or dissolved.
 Debentures can be issued against some assets of the company which means that if certain events
take place, the debenture holder has the right to sell such assets.
 Debenture holders are entitled to their interest before preference and ordinary shareholders are
paid their dividend.
Interim and final dividend
An interim dividend is paid halfway through the accounting period when profit for the half year is known.
Final dividend is paid at the end of the year.
The auditors Report

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 • Most limited companies are required by law to have their books and annual final accounts audited
by an independent qualified accountant. The accounts covered by an audit consist of the profit
and loss account and the balance sheet.
• The auditor’s duty is to ascertain whether or not the accounts give a true and fair view of the state
of affairs.
• Auditors do not guarantee that no fraud or errors were committed.

Post Balance sheet Events

These are events which occur between the balance sheet date and the date on which the financial
statements are approved by the board of directors. These are events which provide additional evidence of
conditions existing at the balance sheet date or conditions which did not exists at balance sheet date.
Accounting for limited liability companies
The main accounts are):
a) the income statement;
b) the balance sheet; and
c) Cash flow statement.
d) Statement of changes in equity
A copy of the annual report containing the above statements is sent to shareholders every year before the
annual general meeting.

Final Accounts of Limited liability companies

The Income statement and Balance sheet should be prepared following IAS 1 Presentation format since
Botswana follows International Financial Reporting Standards. In addition a Statement of changes in
Equity, which is also now part of the annual financial report, is prepared.

IAS 1 Preparation and Presentation of financial statements

1. Terminology
British (Frank Wood) International
Fixed assets Non current assets
Tangible fixed assets Property, Plant and Equipment
Trading, profit & loss account Income statement
Statement of total Recognized gains and Losses Statement of changes in
equity
Stock Inventory
Debtors Receivables
Creditors Payables
Long term liabilities Non current liabilities

2. Income statement format-IAS 1

The functional format:
Expenses are classified according to the function causing them as follows.

AB Ltd Income statement for year ended 31 December 2005

20x5 20x4
Revenue xx xx
Cost of sales (xx) (xx)
Gross profit xx xx
Other income xx xx
Distribution cost (xx) (xx)

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 Administrative expenses (xx) (xx)
Financial cost (xx) (xx)
Profit before tax xx xx
Taxation (xx) (xx)
Profit for the year xx xx

2. Balance Sheet
Assets appear on one section of the balance sheet and are presented in two
Categories: Non-current asset first, and Current assets next, the total is shown.

Equity and liabilities are presented on the lower section of the balance sheet. Equity
items are imported from the Statement of changes in Equity while liabilities are
categorized into Non current liabilities and Current liabilities.
Balance sheet format
Assets
Non current assets
Property, Plant and Equipment xx xx
Goodwill xx xx
Other Intangible assets xx xx
Investments xx xx
Others e.g. deferred tax assets xx xx
xx xx
Current assets
Inventory xx xx
Receivables xx xx
Cash and cash equivalents xx xx
xx xx
Total assets xx xx

Equity and liabilities

Shareholders funds
Share capital xx xx
Share premium xx xx
Revaluation Reserve xx xx
General Reserve xx xx
Retained Earnings xx xx
xx xx
Non-current liabilities
Interest bearing borrowings xx xx
Non-Interest bearing borrowings xx xx
xx xx
Current liabilities
Payables xx xx
Accruals xx xx
Tax payable xx xx
Dividend payables xx xx
xx xx

Total Equity and liabilities xx xx

3. Statement of Changes in Equity

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This statement reconciles the company’s equity at the beginning of the financial
year with equity at the end of the year, and also captures incomes, expenses and
appropriations items that are not reported in the income statement; such as
revaluation gains, adjustment due to changes in accounting policies or correction of
prior year errors and dividends declared etc.

Format of the statement of changes in equity

Share Share Revaluation General Retained Total

Capital Premium Reserve Reserve Earnings
Balance at beginning of year(1) xx xx xx xx xx xx
Revaluation of Property(2) xx xx
Profit for the year xx xx
Dividends declared (xx) (xx)
Transfer to General Reserve xx (xx)
Issue of shares xx xx xx
Redemption of shares(3) (xx) (xx) (xx) (xx)
Balance at end of year xx xx xx xx xx xx

1. Some items may have no opening balances. Balances in the trial balance
are not necessarily opening balance.

2. The amount reported in this statement is the balance after reversals of

previous year’s revaluation losses if any.
3. Premium paid on redemption of shares may be provided out of balances on
share premium account and Retained profit accounts.