Types of Company| Private Ltd, Limited, Public

Kinds of Companies

There are three kinds of companies which can be registered in our country under the provisions of the Companies Ordinance, 1984.

Un-Limited Companies

These are the companies in which the liability of the members is unlimited. It may or may not have share capital. If the company goes into liquidation the private property of the members will be liable for attachment for satisfying debts of the company. As the risk involved is great, unlimited companies are not found in this country. Companies Limited by Guarantee

These are the companies whose shareholders undertake to contribute a certain sum towards the assets of the company in the event of its being wound up to meet the claims of the creditors. Generally, such companies do not have any share capital.

 

From another angle. we can classify companies as private and public.

Private Company

According to section 2 (28) of the Companies Ordinance 1984, a private company means a company which by its articles: Restricts the right to transfer its shares:

Limits the number of its members to fifty not including persons who are in the employment of the company; and Prohibits any invitation to the public to subscribe for their shares, if any or debentures of the company.

Note: A private company is required to add word (Private) as a part of its name before the word limited.

Public Company

It means a company. which is not a Private Company Section 2 (30). A company whose articles do not contain all the restrictions specified in Section 2 (28) is a Public Company. Further, a public company may be listed or unlisted. A listed company is one whose securities are listed in Stock Exchange for purpose of trading in it. In a simple word, a public company is a company that invites the general public to subscribe to its share capital.

Formation of a Company

The founders of the company are called promoters of the company. Promoting persons take initiative in the formulation of the company. Promotion of a company means planning its establishment, negotiation of preliminary contracts, assessment of capital requirements, choice of first directors, drafting of the memorandum, and. articles of association and prospectus and arranging underwriting and other matters relating to raising the proposed capital of the company. The memorandum and articles of association are filed with the Registrar of the Joint Stock Companies. If the Registrar is satisfied that the company is being formed for lawful purposes, that none of its objects stated in the memorandum Is inappropriate or deceptive and that

 

all the requirements of the Company's Ordinance, 1984 have been complied with in respect of registration, he shall retain and register the memorandum and articles of association. When the documents are found in order, the i Registrar issues a certificate of incorporation

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Profit and Loss Account PLS | PLS Appropriation Account

PROFIT AND LOSS ACCOUNT

Companies Ordinance does not prescribe any particular form in which the profit and loss account (or income and expenditure account) of a company should be prepared. However, it has been laid down as to what it shall contain and disclose.

 According to Section 234 (1) every profit and loss account shall give a true and fair view of the profit or loss of the company for the financial year. In order to disclose the true profit or loss of a company for the financial year, it is necessary that the profit and loss account should be so drawn up, that the balance shown at some stage in the account can properly describe as the profit or loss for the financial year and the item set out later in the account can be seen to be:

·        Matters not relative to a fair ascertainment of the profit or loss for the year.

·        Adjustments.

·        Appropriations of the profits including the balance brought forward.

 Contents of the Profit and Loss Account

The profit and loss account of a non-listed company must be prepared in accordance with the requirements of Part-Ill of Schedule Fifth to the Companies' Ordinance. Detailed contents of the profit and loss account of a listed company is prescribed in the Part-II of Schedule Fourth to the Companies Ordinance. Both these schedules themselves are self. explanatory. The former deals with the listed companies and the later provide details for all the other companies. Most of the clauses in the former have been repeated in the later except certain special information additionally required to be disclosed by listed companies. According to Part-||| Schedule Fifth the requirements as to profit and loss account of companies are summarized as follows:

Income

a. Gross turnover and deduction therefrom:

1.     Commission paid to sole selling agents:

2.      Commission paid to other selling agents:

3.     Brokerage and discount on sales.

b- Income from investments, showing separately the income from each associated undertaking and other investments.

c-  Interest/profit accrued or received showing separately against loans and advances.

d- Profit on sale of the investment.

e- Profit on sale of fixed assets.

f-  Income arising from any unusual transaction.

G- Income arising against any prior year item: and

h- Other income stating each material item separately.

 Material Consumption & Stock Position:

The material consumption figures indicating the opening and closing balance of raw material, work-in-progress and finished goods and the purchase of material and stock during the year must be stated.

In case, however, by. the accounting method employed by the company, the "cost of material consumed" or "cost of purchased finished goods sold" can be worked out, then the disclosures of opening and closing stocks (as discussed above) can be dispensed with.

 Expenditure

Expenditure incurred under the following heads must be stated separately:

a)    Store and spares consumed Fuel and power

b)   Salaries, wages, including bonus, provident fund contribution and other staff welfare expenses

c)    Rent, rates, and taxes

d)    Insurance premium

e)    Repair and maintenance

f)      Patent, copyrights, trademarks, royalties and technical assistance tee and expenses

g)    Donations

h)   Depreciation or other provisions in diminution in value of assets and investment

i)      Interest showing separately on debentures, long term loans, and short-term loans, on borrowing from associated undertaking, directors and managing agents

j)      Loss on sale of investment and on sale of fixed assets

k)   Bad debts are written off and provision for doubtful debts distinguished between trade debts and other debts, and

l)      Provision for taxation indicating the provision for deferred tax.

Cost of Goods Manufactured/Exported

The PLS Account shall be so drawn up as to disclose separately the manufacturing trading and operating results.

In the case of a manufacturing concern, the cost of goods manufactured must be shown in the accounts.

The value of items during the financial year shall also be shown provided such value exceeds 20% of the total turnover of the company.

Other Disclosures

In the case of listed companies, the following information be disclosed;

The aggregate amount of expenses in respect of salary, fees, allowances, commission, and benefit allowed to:

a)    Directors

b)   Chief Executives

c)    Managing Agents

d)   Executives

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Balance Sheet Format | Assets and Liabilities of Balance Sheet with Complete Detail

BALANCE SHEET

Every company is required to prepare a balance sheet at the end of each trading period. Section 234 provides that the balance sheet shall give a true and fair view of the state of affairs of the company at the end of its financial year and should comply with requirements of Part-ll of Schedule Fifth in the case of unlisted companies and Part-II of Schedule Fourth in the case of listed companies.

 Format of Balance Sheet

 No form has been prescribed for the balance sheet in the companies' ordinance. It permits the presentation of the balance sheets both in horizontal as well as in vertical forms. A format of Balance Sheet has been developed in horizontal form from the fifth schedule meant for non-listed companies. Additional information required for listed companies under the fourth schedule is also given separately.

Format of balance sheet in statement Form Capital and liabilities

1.    Share capital and Reserves:

                        i.            Authorized share capital-ordinary share of Rs. Total:

                     ii.            Issued subscribed and paid-up capital.

                   iii.            Reserves:

                                  i.            Capital reserves

                               ii.            Capital redemption reserve

                             iii.             Share premium account Surplus on revaluation of the fixed asset

                             iv.            Pre-incorporation profits

                                v.            Any other capital reserve (specify)

 

2.    Revenue reserves

                                  i.            General reserve

                               ii.            Dividend equalization reserve

                             iii.            Deferred depreciation reserve

                             iv.            Un-appropriated profits

                                v.            Any other revenue reserve (specify)

 

3.    Long term loans

                                  i.            Secured loans

                               ii.            Unsecured loan

4.    Debentures and participation term certificate

a.      Secured:

                                i.            Debentures

                             ii.            Participation term certificates

b.     Un-secured:

1.                  Debenture

2.                2. Participation term certificates

 

5.    Deferred Liabilities:

                                  i.            For taxation.

                               ii.            For pension, gratuity and other staff benefits schemes.

                             iii.            Other deferred liabilities.

6.     Long Term Deposits:

7.     Current Liabilities:

1.     Short term loans:

a.      Secured:

1.     From banks & financial institutions.

2.     From subsidiaries, managed Modarabas and associated undertakings.

3.     From directors, chief executive & managing agents.

4.     From others.

b.      Un-secured:

1.     From bank & financial institutions.

2.     From subsidiaries, managed modarabas and associated undertakings.

3.     From directors, chief executive & managing agents.

4.     From others.

8.             Current portion of long terms liabilities.

9.              Deposits.

10.               Creditors.

11.               Accrued liabilities

12.               Bills payable.

13.                Advance Payments.

14.               Interest accrued on secured loans,

15.               Profit accrued on Participation Term Certificates. Other liabilities e.g. unclaimed dividends, unpaid dividends.

16.               Provision for taxation:

a.      Excise duties

b.     Customs duties

c.      Sales Tax

d.     Income Tax

e.      Other Taxes.

17.    Proposed dividend.

       18.    Other provisions and accruals for contingencies.

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Share Capital and Rights of Shareholders

SHARE CAPITAL

 

Main Sources of Corporate Finance

There are four main sources of obtaining or raising funds to finance a company.

Share capital-members of the public that subscribe to the shares of the company are called shareholders. They are real owners of the company and are called "equity-holders" of the company.

Debentures

A part of the finances of the company may be in the form of debenture capital. A debenture is really loan capital and is secured on the assets of the company. Debentures have to be paid back according to the terms and conditions of their issue. Accumulated profits in the form of reserves may constitute a considerable part of the company's finances after a number of years of successful business operations.

Loans from banks and other financial or commercial institutions.

Classification of Share Capital

The share capital of a company is usually classifying as under:

 

Authorized, Registered or Nominal Capital

This is the amount of capital with which the company is formed and incorporated. It is the full amount of share capital, which is shown in the memorandum of association with which the company has been registered. This is also the maximum amount of capital, which a company is authorizing to raise, hence the term authorized capital is used.

 

Issued Capital

This capital represents the number of shares that have been issued to the public for subscription for cash. It includes shares allotted to venders as fully or partly paid for consideration other than cash.

Subscribed Capital ii.

It is that part of the issued capital which is subscribed and subsequently allotted in shares to the public or to the vendors as fully or partly paid.

Called-up Capital

This is the amount of money that the public and vendors are called upon to pay out of the subscribed capital. A company does not necessarily need the full amount of the subscribed capital immediately and therefore, sometimes calls up only a part of the subscription. For example, for each share of Rs. 10- the company may make the first call of Rs. 4/- in the first instance and call the balance later as it deems fit. But this practice has now been abolished in Pakistan.

 

Paid-up Capital

It denotes a portion of the called-up capital that has been actually paid up by the shareholders. 

Reserve Capital

It represents that amount of subscribed capital which has not been called-up and which the company by special resolution has decided, shall not be capable of being called-up, except in case and for the purpose, of winding-up.

Watered Capital

It is that portion of the share capital, which is not represented by any tangible or realizable assets, e.g., the amount paid for the goodwill of an old going concern. The term "Watered Capital' is also used to denote share capital issued as a bonus shares out of accumulated profits as it causes a reduction.

 

 Rights of Shareholders

• The ownership of stock in a company usually carries the following basic rights:

• To vote for Directors, and thereby to be represented in the management of the business.

• To share profits by receiving dividends declared by the board of directors and subsequently approved in the annual general meeting. Shareholders in a company may not make

• withdrawals of company assets, as may an owner of a un corporate business. However, the earnings of a profitable company may be distributed to shareholders in the form of cash dividends. The payment of a dividend always requires formal authorization by the board of directors. To share in the distribution of assets if the company is liquidated. When a company legally ends its existence, the creditors of the company must first be paid in full; any remaining assets are divided among shareholders in proportion to the number of shares owned.

• To subscribe for additional shares in the event that the company decides to increase the amount of stock outstanding. This preemptive right entitles shareholders to maintain their percentages of ownership in the company by subscribing, in proportion to their present shareholdings. to any additional shares issued. Companies organized in certain countries do not grant. Preemptive rights to their shareholders. In other cases, shareholders sometimes agree to waive their preemptive rights in order to grant more

• flexibility to management in issuing stock.

• Shareholders meetings are usually held once or twice a year. Each share of stock is entitled to one vote. In large companies, relatively few persons usually attend these annual meetings, often by less than I% of the shareholders. Prior to the meeting, the management groups will request the shareholders who don't plan to attend in person to send in proxy statements assigning their votes to the existing management. Through the use of this proxy

 

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