A limited company is an organization that has a separate legal entity from that of its owners. Limited companies are also known as Limited Liability companies because the liability of their shareholders is limited to the shares that they hold in the company. Limited liability means the maximum amount that a shareholder may lose, in the event that the company becomes insolvent and cannot pay off its debts is his share of the capital in the business.
Limited companies are formed to overcome some of the weaknesses of sole traders and partnerships such as the difficulty to raise big amounts of capital, the unlimited liability of the owners and the continuity of the business.
So, let’s learn more about the types of shares and capital invested in limited companies.
Authorized capital: It is the maximum amount of share capital that a company is empowered to issue. For example, the Companies Act 2006 in the United Kingdom has abolished the need to show authorized Share Capital in the Statement of Financial Position.
Issued Capital: It is the amount of share capital that has actually been issued by the company. The amount of issued capital should not exceed the authorized capital.
Called Up Capital: It is money required to be paid by shareholders. For example, if a company issues 400, 000 ordinary shares of $ 1, it may call shareholders to pay only part, say $ 0.75 per share of the amount due on their shares, until further sums are required. The issued share capital would be $ 400 000 and the called-up share capital would be $ 300 000.
Uncalled Capital: It is the amount of the share capital not yet called up by the company. In other words, uncalled capital is that part of the amount payable on all shares for which payment has not been requested.
Paid Up Capital: When capital is called up, some shareholders might delay their payment. Paid-up capital is the portion of the called-up capital that has been paid up to the company.
Called up share capital unpaid: The portion of the called up capital that has not been paid.
Types of Shares
Preference shareholders are entitled to a certain dividend rate.They are also entitled to receive dividends before the ordinary shareholders, but do not carry a right to vote. If the preference shares are cumulative, the dividends due on cumulative preference shares will accumulate if the company is unable to pay a dividend in any particular year. The arrears of dividends are carried forward to future years when sufficient profits are made to pay the arrears.
Participating preference shares are a special category of preference shares. Participating shareholders are entitled to participate together to a specified extent in distributable profits. Thus, in addition to a fixed rate of dividend, participating preference shareholders also receive a share of the profits.
Preference shares are usually classified in one of two ways: Redeemable and Irredeemable.
Redeemable Preference Shares
These types of shares mean that the company will redeem (buy back) the shares at a later date. The shares will then be canceled after redemption and no further dividends paid. However, it should be noted that Redeemable Preference Shares are treated as loans and are included as “non-current liabilities” in the statement of financial position. It may be classified under “current liabilities” if the redemption is due within twelve months. Dividends paid on redeemable preference shares are treated like interest paid on loans and are included in the Income Statement as finance costs.
Irredeemable Preference Shares
These types of shares are treated just like the other shares. They form part of the shareholders funds and their dividends are treated as appropriation of profit and included understatement of changes in equity.