Prepared By: Ms. A.

Johnson

Principles of Accounts
Grade 11
2022-2023
Topic: Accounting for Limited Liability Companies

Limited Liability Companies

Class Objectives:

1. What is a limited Liability Company?

2. Features of a Limited Liability Company
3. Identify the types of limited liability companies
4. Outline the advantages and disadvantages of a limited liability company
5. Describe the various methods of raising capital available to limited liability companies
6. Identify the various types of shares and the rights of the owners of each type of share
7. Prepare journal entries to record the issue of shares and debentures

What is a limited Liability Company?

A business structure where the owners (shareholders) are liable only to the amount they have invested (shares
bought). It is to be treated as a “separate legal entity” according to the Companies Act (1985)

Features
1. Separate Entity
LLC is a separate legal entity; meaning thereby that it can own a property, retain attorneys, sell
or buy a property, etc on its own. It is distinct from its owners. Owners are not responsible for the
obligations of the corporation.

2. Limited Liability
One of the features of LLC is the limited liability of the employees, members, managers, etc. It
simply means that the members are not responsible for the misdeeds, legal faults of the other
members. Hence, they have protection for the same. But they are responsible for their own
wrong legal misconducts.

3. Tax Ease
This feature of LLC gives the members of the corporation an option to tax themselves either as a
sole proprietorship, partnership or as a  corporation unless otherwise stated. Sole proprietorship-
as a single member, partnership- as a group of members, and corporations- as a single or
Prepared By: Ms. A. Johnson

multi-members. By choosing the right type of corporate structure, it helps the LLC members to
decide which of them is the most suitable and profitable for them.

4. Simplicity
There is a simplicity in the case of documentation and carrying out operations of the company.
There is a less record keeping comparatively.

5. Flexibility
While the corporations continue to operate in case of any death or if anybody leaves. However,
this condition is not compulsory in the case of LLC. It is fully the member’s decisions whether or
not to continue in the same company or create their new one.

Types of limited liability companies

● Public Limited Companies
A public limited company ('PLC') is a company that is able to offer its shares to the public.
They don't have to offer those shares to the public, but they can. A PLC has the following
conditions:
1. Minimum membership is one, there is no maximum
2. The company name must end with the word PLC (Public Limited Company
3. Its Memorandum of Association states that it is a public company, and has registered as
such

● Private Limited Companies

A private limited company, or LTD, is a type of privately held small business entity, in which
owner liability is limited to their shares, the firm is limited to having 50 or fewer shareholders,
and shares are prohibited from being publicly traded. The main features of a private limited
company are:
1. No minimum requirement for issued share capital
2. Cannot offer its shares to the general public
3. Have at least one member and a director who may be the sole shareholder.
4. No need to hold an Annual General Meeting (AGM)
Prepared By: Ms. A. Johnson

Advantages of Limited Liability Company

1. The owners (shareholders) of the company have limited liability

2. In law, a limited company is a separate legal entity
3. Capital can be more readily raised to funds expansion
4. The long term viability is not affected by the death of the owners (shareholders)
5. Larger companies can offer employees an incentive by giving shares and or offering
employees the opportunity to purchase shares at an advantage price.
6. Shares in a public limited company are listed on the stock exchange and can therefore, be
easily bought and sold.

Disadvantages of Limited Liability Company

1. A limited liability company must conform to government regulations and legislations.
2. Shares in a private limited company can only be bought and sold in private
3. The decision making process can take a longer time to achieve than in smaller
organization.
4. Larger organization can lose personal contact with their employees who may lose interest
as a result.
5. Since financial reports of limited companies are sent to all shareholders and in the case of
public limited companies they are published, the financial data no longer remains private.

Methods of raising capital

1. Reinvesting profits
2. Issuing of Shares (preference shares and ordinary shares)
3. By borrowing through banks or bonds

Types of shares
● Preference Shares –Preference shareholders get an agreed percentage rate of dividend
before the ordinary shareholders receive anything. preference shareholders have:

▪ No voting rights

▪ Receive a fixed dividend rate

Prepared By: Ms. A. Johnson

▪ Paid before ordinary shareholders

● Ordinary Shares- ordinary shareholders receive the remainder of the total profits
available for dividend. There is no upper limit to the amount of dividends they can
receive. Ordinary shareholders have the following rights:

▪ They have a right to vote at an annual general meeting.

▪ They have a right to dividends

Journal entries to record the issue of shares

When a company is first formed, it raise its capital by issuing shares. Thus, if it needs 100,000 to
finance its business, it may issue 100,000 ordinary shares at $1 each to provide the money.

The company invites people to apply for the shares. If the full amount is to be paid on
application, then the would be shareholders sends in $1 for each shares they have applied for. if
the person sends in more money than the number of shares to be allotted, then refund will have
to be made for access application.

Example 1:
The company has 10,000 ordinary shares of $1 each to issue. Exactly 10,000 shares are applied
for with the applicants paying $1 per share. The shares are then allotted.
General Journal
DR CR
$ $
Bank 10,000
Ordinary Share Capital 10,000
To record the issue of 10,000 ordinary shares at $1

Ordinary shares- 10 000

Rate - $ 1
Total share capital- $ 10,000
Prepared By: Ms. A. Johnson

The company has 150,000 10%preference shares of $2 each to issue. Exactly 150,000 shares are
applied for with the applicants paying $2 per share. The shares are then allotted.
General Journal
DR CR
$ $
Bank 300,000
10% Preference Share Capital 300,000
To record the issue of 150 000 10%preference shares at
$2

Preference share - 150 000

Rate- $2
Total share capital- $300,000

Cash received as applications for shares

● Debit bank
● Credit share capital

Example to try:
The company has 300,000 ordinary shares of $0.50 each to issue. Exactly 300,000 shares are
applied for with the applicants paying $0.50 per share. The shares are then allotted.

General Journal
DR CR
$ $
Bank 150,000
Ordinary Share Capital 150,000
Prepared By: Ms. A. Johnson

To record the issue of 150,000 ordinary shares at $0.50

Ordinary share – 300 000
Rate – $0.50
Total share capital (0.50 X 300, 000) - $150,000

Example 2:
The company has 20,000 ordinary shares of $2 each to issue. Applications, with the payment, are
received for 23, 000 shares. Refund is made in respect of the excess money received.

General Journal
DR CR
$ $
Bank (23,000 X $2) 46,000
Ordinary share applicant 46,000
To record application for 20,000 $2 ordinary shares
oversubscribed- applicants for 23,000 $2 shares was
received.
Ordinary share applicants (3000 X 2) 6000
Bank 6000
To record refund oversubscribed shares (3000 X $2)
Ordinary share applicant 40,000
Ordinary share capital 40,000
To record the allocation of 20,000 $2 ordinary shares

Any excess money received, when refunded

● Debit Share applicants
● Credit Bank

NB: Ordinary share capital is the sum of money raised by a corporate from private and
public sources through the issue of its common shares. 
Prepared By: Ms. A. Johnson

Please use the link provided below to watch a video on how to record journal entries for the
issuing of shares and debentures.

https://www.youtube.com/watch?v=KFh543bRnGY