Abstract

Organisation and operation of the company is considered in the text.

Various types of the companies are described.

Special emphasis is laid on the advantages and disadvantages of the companies.

TEXT II

COMPANIES: SHARFEHOLDERS; SHAREHOLDERS’ FUNDS.

A company or business corporation is an institution established for the purpose of making profit. It is operated by individuals. Their shares of ownership are represented by stock certificates. A person who owns a stock certificate is called a stockholder.

The ownership of shares or stock in a company usually carries the following basic rights:

1. To attend the general meeting hold annually at which financial statements and directors’ reports are considered.

2. To vote for directors and thereby to be represented in the management of the business. The approval of a majority of shareholders may also be required for such important actions as the declaration of dividend and splitting of issued capital into a larger number of shares.

3. To share in profits by receiving dividends. Directors commonly have power to declare interim dividends, but usually only power to recommend final dividends.

4. To share in the distribution of assets if the company is liquidated. When a company ends its existence, the creditors of the company must first be paid in full; any remaining assets are divided among shareholders in proportion to the number and class of shares owned and rights set out in the articles.

The ownership of a share does not give a person the right to intervene in the management of a company or to transact business on its behalf. Although the shareholders as a group own the company, they do not personally own the assets of the company. Neither do they personally owe the debts of the company. The shareholders have no direct claim on profits earned; profits earned by a company do not become income to the shareholders unless there is a declaration of dividend.

Shareholders’ meetings are usually held once a year and such questions as the election of directors, the appointment of auditors, the directors’ report and the financial statements are presented for approval. In large companies with shares owned by great numbers of people, these annual meetings are usually attended by relatively few persons, often by less than one per cent of the shareholders. The meetings are generally routine affairs, since a favourable vote is usually assured on proposals sponsored by the directors. However, the discussions of operating results and other issues raised during the meeting are widely publicized in the press; consequently, the shareholders’ meetings are in effect public forums in which management reports on its stewardship of the company’s resources.

Shareho1ders’ funds.

The section of a balance sheet showing assets and liabilities will be much the same for a company as for a single proprietorship or partnership but the information contained in the financial statements must conform to the requirements of the companies code. The owner’s equity section is the principal point of contrast. In a company, the term “shareholders funds or shareholders’ equity” is synonymous with owners’ equity. The capital of a company, as for other types of business organizations, is equal to the excess of the assets over the liabilities. However, the capital of a company may be divided into several segments. These various classifications of corporate capital are rather complex, but at this point we are concerned with a simplified model in which the capital of a company is carried in only two ledger accounts and is shown on the balance sheet in two separate portions. These two classifications are the capital contributed by the shareholders, and the capital accumulated through profitable operations.

The capital contributed by shareholders is regarded as permanent capital not ordinarily subject to withdrawal. The unit of ownership in a company is a share and the amount of issued and paid up capital is equal to the total number of shares issued multiplied by a stipulated amount (per value) per share, provided the shares are fully paid.

The second major type of company capital is “retained earnings”, consisting of reserves and unappropriated profits. At the end of each accounting period, the balance of the Profit and Loss Summary Account is closed by transfer to Profit and Loss Appropriation Account. The latter is debited to transfer to Reserve Accounts and to Proposed Dividends Account. This balance may be termed “Unappropriated Profits”.

Authorized Capital.

The memorandum of association specifies the number of shares of capital that a company is authorized to issue and the nominal value per share. The company may choose not to issue immediately all of the authorized shares; in fact, it is customary to secure authorization for a larger number of shares that presently needed. In future years if more capital is needed, the previously authorized shares will be readily available for issue; otherwise the company would be forced to apply for permission to increase the amount of authorized or registered capital.

Issued Capital

The unit of ownership is the share. Shares may be of different classes, conferring different rights. Shares have a nominal, face or par value which represents the maximum liability of the shareholder taking up shares in respect of paid up capital. Shares may be issued at a premium and, in exceptional cases, at a discount. If shares are issued at a premium, the shareholder must pay the company more than the face value of the shares. The difference between the face value and the price at which the shares are issued must be credited to a Premium on Shares Account. The latter is a reserve account. The total amount of issued shares at any given time represents 100 per cent ownership of the company. Issued shares are those in the hands of shareholders. Assume, for example, that the Southern Co. Ltd is registered with authority to issue 150 000 shares of $1 each. However, only 100 000 shares are issued, because this amount provides all the capital presently needed. The holders of the 100 000 shares own the company in its entirety.

If we assume further that Richard Jones acquires 10 000 shares of the 100 000 shares issued, we may say that Jones has a 10 per cent interest in the company. Suppose that Jones now sells 5000 shares to Smith. The total number of shares issued remains unchanged at 100 000 although Jones’s percentage of ownership has declined and a new shareholder, Smith, has acquired an interest. The sale of 5000 shares from Jones to Smith had no effect upon the company’s assets, liabilities or shareholders. It is shown only on the list of shareholders: the Register of Members show the number of shares presently held by each owner.

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