IGC-L22 — Limited Company Basics
Understanding the structure of limited companies, their ownership, and key financial concepts
Learning Objectives
- define a limited company
- distinguish between private and public limited companies
- understand the concept of limited liability
- identify shareholders and directors
- explain share capital and dividends
Concept Framework
What is a Limited Company?
A limited company is a business organisation that has a separate legal identity from its owners.
This means the business is treated as a separate entity from the shareholders.
Limited Liability
Limited liability means that shareholders are only responsible for the debts of the company up to the amount they have invested.
Their personal assets are protected.
Types of Limited Companies
Private Limited Company (Ltd)
• shares are not offered to the public
• ownership is restricted
• usually smaller businesses
Public Limited Company (PLC)
• shares can be sold to the public
• listed on a stock exchange
• usually larger businesses
Ownership and Management
Limited companies have:
Shareholders (Owners)
Provide capital and receive dividends
Directors (Managers)
Run the business and make decisions
Share Capital
Share capital is the amount invested by shareholders in exchange for shares.
Example:
If a company issues 10,000 shares at £1 each:
Dividends
Dividends are payments made to shareholders from profits.
Dividends are not expenses — they are a distribution of profit.
Diagram 1 — Structure of a Limited Company
Shareholders
│
↓
Provide Capital
│
↓
Limited Company
│
↓
Managed by Directors
│
↓
Generates Profit
│
↓
Dividends paid to Shareholders
Diagram 2 — Key Differences (Sole Trader vs Company)
SOLE TRADER LIMITED COMPANY
One owner Many shareholders
Unlimited liability Limited liability
Owner manages business Directors manage business
Profit belongs to owner Profit shared as dividends
Worked Examples
A company issues:
50,000 shares at £1 each
Profit for the year = £20,000
Dividend declared = £8,000
Remaining profit retained in business:
📌 Additional company-based questions are available in the
🎯 Lesson wise resources, Module wise resources, Guess Question Papers + YouTube Explanation section.
Students should practise structured questions to understand company accounting concepts clearly.
Structured Practice
Level 1 – Concept Check
Define a limited company.
State one advantage of limited liability.
Who manages a company?
Level 2 – Application Practice
A company issues:
20,000 shares at £2 each
Calculate total share capital.
Level 3 – Examination Style Question
Explain two differences between a sole trader and a limited company.
(4 marks)
📌 Additional structured Statement of Financial Position questions are available in the 🎯 Lesson wise resources, Module wise resources, Guess Question Papers + YouTube Explanation section.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Proficiency Check
Learn → Unlearn → Relearn
Students who believe they understand this topic should attempt the following:
- Explain the meaning of limited liability.
- A company earns £30,000 profit and pays £10,000 dividends.
Calculate retained profit. - Explain why shareholders and directors have different roles.
If any question cannot be answered confidently, review the lesson carefully.
Detailed Activity Solutions
Solution to Level 2 question
20,000 × £2 = £40,000
Solutions to Proficiency Check
30,000 − 10,000 = £20,000
How This Topic Appears in the Examination
This topic commonly appears through:
• theory questions on company structure
• short calculations on share capital
• comparison questions (sole trader vs company)
Examiners frequently assess:
• understanding of limited liability
• distinction between ownership and management
• correct terminology
Students should practise theory-based questions and review video explanations for clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Self-Assessment Checklist
- I understand what a limited company is
- I understand limited liability
- I can calculate share capital
- I understand dividends and retained profit
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