Accounting, Purchasing & Cost Control PDF

Accounting, Purchasing, & Cost Control T E A C H E R : WA R D I S S A BROWN Recap / Announcements CH 12 The Legal Forms of Organisation  ❑One of the first decisions an entrepreneur must make is regarding establishing the legal form of organization of the...

Accounting, Purchasing, & Cost Control T E A C H E R : WA R D I S S A BROWN Recap / Announcements CH 12 The Legal Forms of Organisation  ❑One of the first decisions an entrepreneur must make is regarding establishing the legal form of organization of the business. ❑The type of legal organization assumed by a business is normally a function of the amount of finance required and the size of the business. Once established, the legal form of organization affects a business in the following ways ❑The taxation requirements of a business Introduction ❑The legal requirements ❑The audit and financial requirements ❑The sources of finance available ❑The following types of legal organisations are available to a business ❑Sole proprietorships ❑Partnerships ❑Limited liability companies ❑Not-for-profit organizations  ❑The sole trader legal form of organization comes into being when an individual sets up in business and starts to trade in his or her own name. ❑A sole trader can also register a business name ❑Advantages ❑Simplicity and ease to set up ❑The lack of legal controls and constraints. However, Sole Trader still must keep accurate books and records Organisations ❑Privacy. Accounts are not required to be published ❑Disadvantages ❑The owner has unlimited liability and is personally liable for all the debts of the business. So personal assets may be losses. ❑Financing may be difficult due to it be one owner ❑The rate of taxes are higher Partnerships ❑An association of persons carrying on business in common with a view to making a profit ❑Agreement can be verbal or written. Most are written and governed by the Deed of Partnership. ❑The Deed of Partnership would normally contain ❑The name of the partnership ❑The date the partnership commenced ❑The planned duration of the partnership ❑The rules governing the retirement or admittance of partners ❑The capital subscribed and rules regarding the distribution of profits ❑Cheque signing regulations Partnerships ❑There are two type of partnerships ❑A general partnership ❑A limited partnership ❑General Partnership – Each partner contributes an agreed amount of capital and is an agent of the partnership and thus has full liability for all of the debts of the partnerships. General partnerships are most common and can be seen in the accounting and legal professions ❑Limited Partnership – A limited partnership must consist of at least general partner who shall be liable for all the debts and obligations of the partnership and at least one limited partner. A limited partner is one who shall not be liable for the debts and obligations of the partnership beyond the amount of capital they invest. Limited partners may not take an active role in the running of the business.  ❑Simplicity and ease with which one can set up in business. ❑The general lack of legal controls and restrictions compared to limited liability companies. ❑Partners have a blend of skills and expertise Advantages which can help create a more effective organization ❑Partnerships have greater access to capital due to the fact that there is a greater pooling of resources and borrowing capacity. ❑Privacy as the accounts of partnerships are not required to be published to the general public but are for tax purposes Disadvantages ❑Partnerships can be unstable and can break up over trivial issues ❑As in sole traders, partnerships are not protected by limited liability ❑Each partner is liable for the debts of the partnership: joint and several liability ❑The life of the partnership can be limited by agreement or by the life of the partners ❑Profits are taxed at income tax rates  Limited liability A company is a companies can have corporate body which a perpetual life since has a legal existence ownership is quite separate from Limited represented by shares its owners. that are transferable Liability Companies A company is a business entity created by law that is The liability of its owners is limited to capable of entering what they have into contracts, invested and what incurring liabilities they owe the and carrying out company. business. Formation of a Company ❑The formation of a limited company is handled by lawyers or corporate administrators who draft the necessary documents that form its make-up. These documents are then registered with the Registrar of Companies whereupon a certificate of incorporation is issued to the company. The company is now registered and can commence trading. ❑The following main legal documents are required: ❑Memorandum of association ❑Articles of association ❑Statement of nominal or authorized share capital. This is the maximum amount of share capital a company can issue, once incorporated. ❑Statutory declaration of compliance with all the requirements of the relevant companies act. ❑List of persons who have consented to be directors ❑Form of consent to act as directors from those who have agreed to be directors ❑The first two documents are the main documents representing the company. Formation of a Company Memorandum of Association Articles of association This document governs the relationship between This article govern the internal workings of the the company and the external environment. company. It is the company’s constitution They form a contract between the company and its It includes shareholders, defining their respective rights and Company name (with Ltd as the last word in the duties. title) The articles would deal with issues such as the Location of registered office rights attached to shares, procedures at shareholders meetings, appointment/retirement The objectives of the company and powers of directors A limited liability clause Articles can be changed from time to time by a The authorized share capital of the business special resolution of the shareholders The signatures of subscribers (usually the directors) with their addresses and their shareholding in the company  There are four types of companies to choose from. Private Limited Companies Has between two and fifty shareholders (minimum of two) Can commence immediately on incorporation Right of transfer restricted as there is no market in which to actively trade shares The company is prohibited from inviting the public to subscribe for its shares and loan notes Accounts must be audited each year All companies must file their accounts with the CRO or Registrar of Companies Types of Generally private companies are formed to ensure their owners benefit from limited liability. Companies Public Limited Companies (PLC) A minimum of seven shareholders are required for incorporation. There is no maximum limit Shares of freely transferable. In other words, a market exists to buy and sell the shares Shares and Loan/Notes/Debentures may be quoted on the stock exchange subject to permission by the relevant authorities A PLC cannot commence trading until the Registrar of Companies issues a trading certificate to commence business. Accounts must be audited each year and a copy filed with the Registrar of Companies where they are available for public inspection through an on- line search. Generally are significantly arger than private companies Most appropriate to raise capital as they can issue their own shares and loan notes publicly. Table 12.2 Comparison of ownership classification  ❑Companies Limited by Guarantee ❑In a company limited by guarantee, the members usually do not provide capital on its formation but guarantee to pay its debts up to a certain limit in the event that the company goes into liquidation. ❑Method normally used in non-profit organizations such as charities, clubs and societies. Types of ❑Unlimited Companies ❑An unlimited company is one which ensures that its Companies member can be personally liable for the debts and liabilities of the business. The liability can be totally unlimited or limited to a certain figure. ❑Advantages ❑The right to reduce issued capital without court permission. ❑Exemption from filing accounts with Registrar of Companies.  Advantages of Limited Liability Company Status 1. The investor’s liability is limited. 2. Companies tend to have greater access to capital 3. The business continues despite the death or incapacity of the investors/owners Formation 4. Profits are taxed at the corporation tax rate of a Disadvantages of Limited Company Status Company 1. Limited companies are more regulated than either partnerships or sole traders 2. It is more difficult to withdraw money from a company than it is for a sole trader or partnership. 3. Lack of privacy. Financial statements have to be filed with the Registrar. Legal Requirements of Limited Companies ❑The main legal requirements are contained in the Companies Act Companies are required to carry out the following: ❑Keep proper books of accounts. Must be audited by independent auditors. ❑Register with the Registrar of Companies. ❑Hold an Annual General Meeting (AGM) once in every calendar year. Must be held within 9 months of the end of the accounting period. The income statement and statement of financial position presented to shareholders. The shareholders can also vote for the directors of the Company. At these meetings also can determine if the Company will be issuing dividends to the shareholders Legal requirements of Companies ❑Keep what are called statutory books which included the following ❑Register of shareholders ❑Register of debenture holders ❑Register of assets given as security ❑Register of directors and secretaries ❑Register of director’s interests in ordinary shares and debentures ❑Minute books of director’s meetings and general meetings ❑Record of declarations of directors of interests in company contracts ❑A company is a separate legal person so it can be sued, not the shareholder. The company has limited liability so the maximum amount that shareholders can lose is based upon the amount invested. Other types of Legal Organistions Not-for Profit Organisations Example: 1) Co-operatives 2) State sponsored enterprises 3) Charities