Limited companies come into existence because of the growth in size of business and the need to have many investors in the business. Partnerships are not suitable for such businesses because the membership is limited to twenty persons. There are two principle types of companies: Private companies Are companies owned by two or more people but not exceeding fifty members excluding both current and past employees of the company? These companies have the words ‘limited’ at the end of the name. Being private, they cannot invite the members of the public to invest in their ownership.
Public companies They are much larger in size as compared to private companies. They have the words ‘public limited’ company at the end of their name. They can invite the members of the public to invest in their ownership and the companies may be quoted/listed on the stock exchange.
Legal formalities governing the formation of a company
A Company is formed by a group of people called promoters. For a private company there are 2 promoters while there are 7 promoters incase of a public company. Promoters must submit the following documents to the registrar of companies.
- Memorandum of Association (M.O.A)
This is the constitution of a company and it sets out the main objectives of the company being formed. Companies are required only to undertake projects/objectives which are laid down in the M.O.A. Any business which the company undertakes that is not specified in the M.O.A is void/ultra vires (beyond the powers). Thus any individual, who engages with a company in activities that are ultra vires, cannot have a legal redress because these contracts are unenforceable in the court of law and vice versa. - Articles of Association (A.O.A)
This document specifies the internal rules that govern the day-to-day activities of the company e.g. appointment of directors, voting rights of shareholders, etc. - List of directors.
- Declaration of compliance
Promoters must sign a statement implying that they have complied with all the rules and regulations governing the formation of the company.
If the registrar is satisfied that all the legal formalities have been complied with, issues the promoters with a certificate of incorporation which signifies the birth of the company. After the registrar has satisfied himself that all the legal formalities have been complied with, the issues the promoters with a certificate of incorporation which signifies the birth of company. After receipt of certification incorporation, private company can start trading immediately. Public limited Companies however, must wait to be issued with a trading certificate after raising the minimum capital to start the business operations.
After formation of a company, directors have to think of ways of raising capital to start business operations. There are various ways of raising capital e.g. Issues of shares and debentures. Raising capital through issue of shares.
