Acca financial Accounting (FA) Study Text ac ca (FA)

Limited liability companies 

Unlike sole traders and partnerships, limited liability companies are established 

as separate legal entities to their owners. This is achieved through the process 

of incorporation. The owners of the company (the shareholders) invest capital in 

the business in return for a shareholding that entitles them to a share of the 

residual assets of the business (i.e. what is left when the company is wound up 

or liquidated). The shareholders are not personally liable for the debts of the 

company and whilst they may lose their investment if the company becomes 

insolvent they will not have to pay the outstanding debts of the company if such 

a circumstance arises. Likewise, the company is not affected by the insolvency 

(or death) of individual shareholders. Limited liability companies are managed 

by a board of directors who are elected by the shareholders. 

The capital structure of a limited liability company is more formalised than that 

of a sole trader or partnership and is illustrated within this chapter. Shareholders 

cannot make withdrawals or 'drawings' from the business in the way that a sole 

trader or partner is able to do. Instead, they receive a return on their investment 

in the company referred to as a dividend which is paid from accumulated profits. 

 

 

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