FORMATION OF A LIMITED COMPANY
This is by registration under the Companies Act. In order to incorporate themselves into a company, those people wishing to trade through the medium of a limited liability company must first prepare and register certain documents. These are as follows:
1. Memorandum of Association: This is the document in which the people express inter alia their desire to be formed into a company with a specific name and objects. The Memorandum of Association of a company is its primary document which sets up its external Constitution and objects.
Contents of the Memorandum Of Association
a)Name Clause; Describes the name of the Company with “Limited” or “Ltd” as the last word thereof for companies limited by Shares or Guarantee.
b) Registered Office Clause; States that the registered office of the Company will be situate in Kenya.
c) Objects Clause; Sets out the purpose for which the Company is incorporated. It describes the contractual capacity of the Company. It delimits the Company’s contractual capacity.
d) Capital Clause; Specifies the capital with which the company proposes to be registered and the division thereof.
e) Liability Clause; states whether the member’s liability is limited or unlimited and whether limited by shares or by guarantee.
f) Association or Declaration Clause; States the desire of the subscribers to be formed into a company.
g) Particulars of Subscribers; Name of the subscribers, postal addresses, occupation, number of shares taken, e.t.c.
h) Date; A memorandum must be dated.
2. Articles of Association; whereas the memorandum of association of a company sets out its objectives and external Constitution‟, the Articles of Association contain the rules and regulations by which its internal affairs are governed dealing with such matters as shares, share capital, company’s meetings and directors among others. The Articles act as the company’s internal constitution
Both the Memorandum and Articles of Association must each be signed by seven persons in the case of a public company or two persons if it is intended to form a private company. These signatures must be attested by a witness. If the company has a share capital each subscriber to the share capital must write opposite his name the number of shares he takes and he must not take less than one share.
3. Statement of Nominal Capital – this is only required if the company has a share capital. It simply states that the company’s nominal capital shall be a specified amount of shillings. The fees that one pays on registration will be determined by the share capital that the company has stated. The higher the share capital, the more that the company will pay in terms of stamp duty.
4. Declaration of Compliance: this is a statutory declaration made either by the advocates engaged in the formation of the company or by the person named in the Articles as the director or secretary to the effect that all the requirements of the Companies Act have been complied with. Where it is intended to register a public company, Section 184 (4) of the Companies Act also requires the registration of a list of persons who have agreed to become directors and Section 182 (1) requires the written consents of the Directors.
These are the only documents which must be registered in order to secure the incorporation of the company. In practice however two other documents which would be filed within a short time of incorporation are also handed in at the same time. These are:
1. Notice of the situation of the Registered Office which under Section 108(1) of the statute should be filed within 14 days of incorporation;
2. Particulars of Directors and Secretary which under Section 201 of the statute are normally required within 14 days of the appointment of the directors and secretary.
The documents are then lodged with the Registrar of companies and if they are in order then they are registered and the Registrar thereupon grants a certificate of incorporation and the company is thereby formed.
Section 16(2) of the Act provides that from the dates mentioned in a certificate of incorporation the subscribers to the Memorandum of Association become a body corporate by the name mentioned in the Memorandum capable of exercising all the functions of an incorporated company.
It should be noted that the registered company is the most important corporation.
The difference between a statutory corporation (parastatal) and a company registered under the Companies Act is that a statutory corporation is created directly by an Act of Parliament.
The Companies Act does not create any corporations at all. It only lays down a procedure by which any two or more persons who so desire can themselves create a corporation by complying with the rules for registration which the Act prescribes.
TYPES OF REGISTERED COMPANIES
Before registering a company the promoters must make up their minds as to which of the various types of registered companies they wish to form.
1. They must choose between a limited and unlimited company; Section 4 (2) (c) of the Companies Act states that “a company not having the liability of members limited in any way is termed as an unlimited company.” The disadvantage of an unlimited company is that its members will be personally liable for the company’s debts. It is unlikely that promoters will wish to form an unlimited liability company if the company is intended to trade. But if the company is merely for holding land or other investments the absence of limited liability would not matter.
2. If they decide upon a limited company, they must make up their minds whether it is to be limited by shares or by guarantee. This will depend upon the purpose for which it is formed. If it is to be a non-profit concern, then a guarantee company is the most suitable, but if it is intended to be a profit making company, then a company limited by shares is preferable.
3. They have to choose between a private company and a public company. Section 30 of the Companies Act defines a private company as one which by its Articles;
(i) Restricts the rights to transfer shares;
(ii) Limits the number of its members to fifty (50);
(iii) Prohibits the invitation of members of the public to subscribe for any shares or debentures of the company.
A company which does not fall under this definition is described as a public company.
In order to form a public company, there must be at least seven (7) subscribers signing the Memorandum of Association whereas only two (2) persons need to sign the Memorandum of Association in the case of a private company.
When a partnership or other forms of unincorporated associations are incorporated, it becomes a registered company which may be public or private.
The registered company is the most advanced form of business association in use today.
This is because it enjoys certain advantages not available to partnerships and sole proprietors.
Hence the balance is always tilted towards the company (incorporation). On incorporation, the association becomes a body corporate. It has a legal personality of its own.
ADVANTAGES OF THE REGISTERED COMPANIES
This can also be referred to as Advantages of Incorporation:
1. Limited liability: Members of a registered company have limited liability; the extent towhich they can be called upon to contribute to the assets of the company in the event of winding up is limited by shares or guarantee. Members are not liable to lose private assets if the company is insolvent.
2. Perpetual succession: Since a registered company is created by law, its life lies in theintendment of the law. It has the capacity to exist in perpetuity. This is advantageous where the company‟s business is prosperous. It also encourages investment on a long-term basis.
3. Capacity to contract and own property: A registered company has legal capacity toown property and can enter into contractual relationships set out in the objects clause.
The company therefore has capacity to invest to enhance profitability.
4. Sue or be sued: A registered company has capacity to enforce its rights by court action and may be sued on its obligations. Members are not bound to sue on behalf of the company and cannot generally be sued for the wrongs of the company.
5. Wide capital base: Compared to other forms of business associations, the registered company has the widest capital base by reason of the wide spectrum of membership.
6. Transferability of shares: Under section 75 of the Companies Act, the shares or other interests of any member of the company shall be moveable property transferable in manner provided by the Articles. Shares in public and private companies are transferable. In public companies, they are freely transferable. The transfer is restricted in private companies under the ambit of Section 30 of the Act.
7. Specialized / qualified management: companies are managed by directors elected by members in general meeting. Under section 177 of the Companies Act, every private company must have at least one director while a public company must have at least two. Shareholders have the opportunity to elect qualified persons as directors.
8. Borrowing by floating charge: Registered companies are free to utilize the facility offloating charge to borrow. This is the use of floating assets as a security. The charge is equitable and remains dormant until crystallization. A floating charge has several advantages:
a. It enables a company with no fixed assets to borrow.
b. It enhances the borrowing capacity of a company with fixed assets.
c. It does not interfere with the ordinary business of the company.
DISADVANTAGES OF THE REGISTERED COMPANIES
These can also be referred to as Disadvantages of Incorporation;
1.Formalities: Companies are subject to too many legal formalities like formation,
meetings, accounts, winding up etc.
2.Publicity: Companies are subject to undue publicity e.g. a company’s documents are open to public scrutiny. Public companies must submit annual accounts. General
3.meetings are held in public. Winding up is conducted in the eyes of the public. Expenses: The registered company is the most expensive form of business association to form, maintain or wind up.
4. Doctrine of ultra vires: The capacity of a company is restricted to transactions set forth in the objects and those that are reasonably incidental thereto. Other transactions are ultra vires and therefore null and void.
5. Corporation tax: The tax payable by companies is relatively higher. This reduces the amounts of profits available to members as dividend.
6. Participation in management: Members other than directors are actively involved in the day-to-day affairs of the company.