2. Limited liability company
• A company can be defined as an artificial person,
invisible, intangible created by or under law with
a discrete legal entity, perpetual succession and a
common seal. It is not affected by the death,
insanity or insolvency of an individual member.
• A company is called as a Limited-Liability
company because the liability of its members is
limited to the amount that they have agreed to
contribute to the company by way of share
capital.
3. Types of Share Capital
A company can issue two types of share capital:
equity share capital and preference share capital.
Equity share capital is otherwise known as owner’s
capital. It is the fraction of total owner’s capital.
The capital invested by the owners in an
organization. Equity share holders are the real
owners of the organization.
4. Preference Share Capital
• Preference share holders are having a
preferential rights on profit. They have a right
to be paid a fixed amount from the profit after
paying to the outsiders.
• On a winding up or repayment of capital, they
have the right to be paid the amount of the
capital paid and any fixed premium or
premium on any fixed scale, as specified in the
memorandum or articles of the company.
5. Types of Preference Share capital
• Cumulative or non-cumulative: In case of
Cumulative preference share, if there is no
adequate profit in the company for a
particular year. In case of non cumulative
preference share, the unpaid dividend is not
accumulated.
• Redeemable preference share and
irredeemable preference shares.
• Convertible and non-convertible preference
stock.
6. Debentures
• Companies borrow from the financial market by
issuing debentures. A debenture is a document,
which either creates a debt or acknowledges the
same under the seal of the company.
• Thus debentures holders are creditors of the
company. Interest on debentures are the charge
against the profit.
• The company issues the certificate to the
debenture holders which is an acknowledgement
of debt.
7. Shareholders and Debenture holders
• A share holder is a member of the company and
has a ownership rights, where as a debenture
holder is simply a creditor of the company.
• A debenture holder is entitled to a fixed rate of
interest where as share holders get the dividend.
• Debenture holders are paid back within a
specified period mentioned but share holders are
not paid back.
• The interest is paid first to the debenture holders
but dividend paid after the interest paid.
8. Share capital, Face value and Book
value
• Share capital includes both the equity capital
and preference capital.
• The company stipulates a certain price for the
shares in its memorandum of association.
Which is otherwise known as Face value of the
share.
• The book value of the share changes with the
changes in the value of the net worth.
9. Authorized Capital
• Authorized capital is the capital which is mentioned in
the Memorandum of Association of the company at
the time of incorporation of the company.
• The company can not issue more than that the
authorized capital.
• Suppose a company is having a authorized capital of
Rs. 1 lakh out of which equity is Rs. 80 thousand and
Preference is Rs. 20 thousand than the total face value
of the equity share and preference share should not
exceed the the authorized amount.
10. Issued, Subscribed and Paid up capital
• Issued capital represents the capital that is
offered to the public for subscription.
• Subscribed capital is that part of the issued
capital, which has been subscribed by the public.
• Called-up capital is that part of the subscribed
capital, which has been called for payment.
• Paid up capital is that part of the called up capital,
which has been actually paid by the share
holders.
11. Forfeiture and Reissue of shares
• Articles of Association of companies usually
authorize directors to forfeit shares of a member
on account of non- payment of call after serving
him a prior notice as prescribed by the articles.
• Directors may either cancel forfeited shares or
reissue those shares at a discount.
• On forfeiture of the shares issued at a premium,
the balance in the share premium account should
not be disturbed.
12. Bonus Issue
• Companies capitalize free reserves, share
premium and capital redemption reserve by
issuing bonus shares to members.
• Issue of bonus shares does not result in inflow
of funds to the company, it results in
conversion of reserves into issued and
subscribed capital.
13. Right Issue
• Subsequent issue of shares by an existing company to
existing share holders are known as Right issue.
• The issue can be made at any time after the expiry of
two years from the formation of the company or the
expiry of one year from the first allotment of shares in
the company, which ever is earlier.
• Such further shares shall be offered to the persons who
on the date are the holders of equity shares of the
company proportionately to their equity holdings on
that date.
14. Buy-Back of Shares
• Buy back of shares means when a company
purchases its own shares from the market.
• Generally the company buy back its shares
and other specified securities out of their free
reserves, securities premium account and
other reserves.
• The buy-back of securities should not exceed
25% of its total paid up capital.
15. Issue and Redemption of Debentures
• Debenture is issued by the company in the
market to raise debt from the market.
• The debentures can be issued at a premium.
When it will be issued at a premium, then the
amount is credited to the debentures premium
account.
• When the debentures will be issued at a discount
then that amount will be shown in the balance
sheet and will be written off over a number of
years in the ratio of amount utilized.
