I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART A: THE CONTEXT AND PURPOSE OF FINANCIAL REPORTING 

 

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 

Have at least one director (two for a public limited company (PLC)) who may also be a 

shareholder; 

 

Prepare financial accounts for submission to Companies House; 

 

Have its financial accounts audited (larger companies only); and 

 

Distribute the financial accounts to all shareholders. 

2.5.1 Advantages of trading as a limited liability company  

(a) 

Limited liability makes investment less risky than being a sole trader or investing in a 

partnership. However, lenders to a small company may ask for a shareholder's personal 

guarantee to secure any loans. 

(b) 

Limited liability makes raising finance easier (eg through the sale of shares) and there is no limit 

on the number of shareholders. 

(c) 

A limited liability company has a separate legal identity from its shareholders. So a company 

continues to exist regardless of the identity of its owners.  

(d) There 

are 

tax advantages to being a limited liability company. The company is taxed as a 

separate entity from its owners and the tax rate on companies may be lower than the tax rate for 

individuals. 

(e) 

It is relatively easy to transfer shares from one owner to another. In contrast, it may be difficult to 

find someone to buy a sole trader's business or to buy a share in a partnership. 

2.5.2 Disadvantages of trading as a limited liability company  

(a) 

Limited liability companies have to publish annual financial statements. This means that anyone 

(including competitors) can see how well (or badly) they are doing. In contrast, sole traders and 

partnerships do not have to publish their financial statements. 

(b) 

Limited liability company financial statements have to comply with legal and accounting 

requirements. In particular, the financial statements have to comply with accounting standards. 

Sole traders and partnerships may comply with accounting standards, eg for tax purposes.  

(c) 

The financial statements of larger limited liability companies have to be audited. This means that 

the statements are subject to an independent review to ensure that they comply with legal 

requirements and accounting standards. This can be inconvenient, time consuming and 

expensive. 

(d) 

Share issues are regulated by law. For example, it is difficult to reduce share capital.  

Sole traders and partnerships can increase or decrease capital as and when the owners wish.