Page 9 - LILITED LIABILITY COMPANIES - INTERMEDIATE

COMPANY ACCOUNTING SESSION 14

1.6 CAPITAL STRUCTURE

The most important distinction to grasp between a limited company and an unincorporated business
concern their respective capital structures. The capital of a sole trader, for example, consists of any
amounts put into the business by the proprietor plus any profits made by the business and not taken out as
drawings. The capital of a limited company is provided by members of the company subscribing for shares.

A person may become a member (shareholder) of a company by promising to contribute capital to it. The
contribution is made by buying shares in the company. A share is an individual unit of capital in a limited
company. The money invested by the shareholders in the company is called share capital. At the end of
the financial year, part of the profits made during the year by the company is distributed to the
shareholders as a return on the investment made. This return is called a dividend.

The following expressions relating to capital need to be understood.

(a) Authorised capital (also known as nominal or registered share capital). This is the maximum amount
of share capital which the company is allowed, by its constitution, to issue. (A company's constitution
comprises two documents, its 'Memorandum of Association' and its `Articles of Association'.) The amount
of authorised capital will vary from company to company. The company may comply with certain
formalities required by law to increase the amount of authorised capital.

For example, a company’s authorised share capital might be 5,000,000 ordinary shares of €1 each. This
would then be the maximum number of shares it could issue, unless the maximum were to be changed by
agreement.

(b) Allotted capital (or issued capital). This is the amount of share capital actually allotted (issued) to
shareholders. A company need not issue all its authorised capital. The issued share capital may never
exceed the authorised share capital.

Continuing the example above, the company with authorised share capital of 5,000,000 ordinary shares of
€1 might have issued 4,000,000 shares. This would leave it the option to issue 1,000,000 more shares at
some time in the future.

(c) Called-up capital. A company may issue shares on terms such that subscribers pay the amounts due by
instalments when called upon to do so. A company may not require all the money due on its shares to be
paid by the share holders immediately and may 'call up' only sufficient for its immediate requirements. For
example, a company might make an issue of € 1 shares on terms that 75c is payable immediately on
application and 25c at some later date. In this case, the term 'called-up capital' would refer to the amount
of the instalments which have fallen due.

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