Limited company

What it means

An incorporated business with a separate legal identity, owned by shareholders whose liability is limited to their investment.

Example

A company issuing shares to raise capital is a limited company.

Why it matters

Companies introduce share capital and reserves, extending the sole-trader model studied first.

In practice

A limited company is a separate legal person, so its financing looks very different in the statement of financial position. The equity section shows share capital and reserves, including retained earnings, instead of one owner's capital account. Profit after tax is not simply added to one capital figure. Part may be paid out as dividends to shareholders and the rest kept as retained earnings.

For example, a company makes RM50,000 profit after tax and pays RM20,000 in dividends. RM30,000 is added to retained earnings. Shareholders have limited liability, so they can lose only what they invested in their shares.

Students often confuse a limited company with a partnership. A company exists independently of its owners and offers limited liability. A partnership is unincorporated, and its owners are personally liable for business debts. A company also replaces the appropriation and current accounts with share capital, reserves and dividends.

If company accounts are your next hurdle, one of our teachers can work through them with you, building on what you already know from sole traders. Book a trial class.

Related terms

• Capital
• Sole trader
• Capital reserve
• Debenture
• Dividend
• General reserve
• Ordinary shares
• Retained earnings
• Share premium

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 5.3 Limited companies (page 16); sub-topic 6.4 Interested parties (page 19).

Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.