This is an association of persons, called share holders who contribute capital to carry out business together with a view of making profit. A company is however a legal entity separate from the shareholders.
Formation of a limited liability company
The people who decided to form a company are referred to as promoters’ .During the formation; the promoters prepare the following documents:
Memorandum of association
This document defines the relationship of the proposed business with the outsiders. The following are some of the clauses it contains:
- Name clause
- Objects clause
- Situation clause
- Liability clause
- Capital clause
- declaration
Articles of association
This document governs the internal operations of the proposed company. it also contains rules and regulations relating the shareholders to the company and the relationship among shareholders themselves. Some of its other contents are:
- Rights of each type of shareholder.
- Methods of calling and conducting meetings.
- Rules governing the election of officials.
- Rules governing preparation and auditing of accounts.
- Powers, duties and rights of directors.
List of directors
This contains the names of the directors, their addresses, occupations shares subscribed by each of them and their acceptance to serve as directors.
Directors statement of agreement
The directors sign in this document to indicate their acceptance to act as directors.
Declaration
This is a document in which the promoters declare that all legal requirements have been complied with .Once the above documents are ready, they are lodged with the registrar of companies and business names who issues a certificate of incorporation. (Registration)
Sources of capital for Limited Liability Company
1. Shares
A share is a unit of capital in a company. Members contribute to the company by buying shares .There are two types of shares: Ordinary (equity) shares and preference shares .Some of the characteristics of ordinary shares are:
- Have voting rights,
- No fixed rate of interest
- Have a claim to dividends after the preference shares.
- Are paid lastly if the company is winding up.
Some of the characteristics of preference shares are:
- Have a fixed rate of dividends.
- Have a prior claim to dividends over the ordinary shares.
- No voting rights.
- Can be either redeemable or irredeemable.
- Can be cumulative or non cumulative
- Can be convertible into ordinary shares.
2. Debentures
Debentures are loans from the public to the company. They therefore carry interest at fixed rates which is payable whether profits are made or not. Debentures can be redeemable or irredeemable. They can also be secured (mortgaged) or unsecured (naked).
3. Loans from banks and other financial institutions.
4. Profits ploughed back.
5. Bank overdrafts.
6. Leasing and renting of property.
7. Credit and hire purchase buying.
Types of limited companies
Limited liability companies may be classified into either private or public limited company:
1. Private companies.
A private limited company may be identified by the following characteristics:
- Can be formed by two to fifty members.
- Does not invite subscription for shares and debentures from the public.
- Restricts the transfer of shares and debentures.
- Can be managed by at least one director.
- Can start business immediately after receiving a certificate of incorporation.
2. Public limited companies
A public limited company may be identified by the following characteristics:
- Formed by a minimum of seven members and no maximum.
- Cannot start business before it receives a certificate of trading.
- Accounts are required to be published.
- Shares and debentures are freely transferable.
- Invite the public to subscribe for shares and debentures.
Advantages of a limited liability company
The following are some of the advantages of a public limited company:
- Wide range of sources of capital.
- Limited liability.
- Can afford specialized management.
- Not affected by death, insanity or bankruptcy of a share holder.
- Enjoys economies of scale.
- Enjoy legal personality status.
- Can afford to put in place schemes meant to motivate employees.
Disadvantages of a limited liability company
The following are some of the disadvantages of a limited liability company:
- High cost and long procedures of formation.
- Operations are inflexible and rigid.
- Alienation of members from the business.
- Lack of secrecy.
- Directors’ personal interest might conflict with those of the company.
- Decision making might take long.
- May suffer from diseconomies of large scale.
- Taxation on profits and also on dividends results into double taxation.
Dissolution of public limited companies
A company may be liquidated under the following circumstances:
- Bankruptcy.
- Decision by share holders to dissolves the business
- If the company acts contrary to the provisions of the objects clause of the memorandum of association (Ultra-vires).
- Court order.
- Amalgamation /absorption.
