Question Tag: Company Structures

a) Advantages of a Limited Liability Company over a Sole Proprietorship

• Distinct Entity: A limited company is a completely separate entity from its owners. Everything from the company bank account, to ownership of assets and involvement in tenders and contracts is purely company business and separate from the interests of the company’s shareholders.
• Limited Liability: Running your business as a limited company means you have the reassurance of ‘limited liability’. Assuming no fraud has taken place, your ‘limited liability’ means you will not be personally liable for any financial losses made by your business.
• Funding: Because a limited company is a distinct entity from its owners, it may be a little easier for a company to secure business finance than it is for their sole trader counterparts.
• Naming: Once you register your company with the registrar generals department, your company name is protected by law. No one else can use the same name as you, or anything deemed to be too similar.
  (6 marks)

b) Explanation of Terms
i) Issued Shares: Represents the actual number of shares that have been issued to shareholders. The number of issued shares cannot exceed the number of authorized shares.
(3 marks)

ii) Preference Shares: Preference shares are shares that confer certain preferential rights on their holder. It can be classified into Redeemable and Irredeemable preference shares. Redeemable preference shares mean the company will redeem (repay) the nominal value of those shares at a later date, while Irredeemable preference shares are treated just like other shares. They form part of the equity and their dividends are treated as an appropriation of profit.
(4 marks)

iii) Ordinary Shares: Ordinary shares are shares that carry no right to a fixed dividend but are entitled to all profits left after payments of any preference dividends. Thus, a holder only receives a dividend after fixed dividends have been paid to preference shareholders. The amount of ordinary dividends normally fluctuates, although it is often expected that it will increase from year to year.
(3 marks)

iv) Debentures: A debenture is a long-term security yielding a fixed rate of interest, issued by a company. A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital.
(4 marks)