Meaning, Types and Formation of Limited companies

WEEK 1

Subject:     Commerce 

Class:     SS 2 

Topic:    Limited Companies 

Content: 1. Meaning of Limited companies 

2. Types of Limited companies 
3. Formation (legal requirements) of limited companies.

Sub-Topic 1: Meaning of limited companies 

A limited liability company is a business owned by a number of people, operated by a legal person on behalf of its owners, with the usual motive of profit and with the provision that the owners are liable to the company only to the value of the share capital they individually hold. 

It is also referred to as a joint stock company and can be defined as an incorporated business organisation established for profit making. 

Evaluation: 

Define a public liability company 

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SUB-TOPIC 2: TYPES OF PUBLIC LIABILITY COMPANIES 

There are two types of limited liability companies, namely: private limited liability companies and public limited liability companies: 

• Private Limited Liability 

A private limited liability company has the following features or characteristics 

1. It restricts the right to transfer its shares 
2. It limits the number of its members from two to fifty (2-50) persons 
3. It does not subscribe shares to the public 
4. The name of the company must end with “Limited”. 
5. The shareholders liability is limited. 

• Public Limited Liability company 

A public limited liability company has the following features or characteristics 

1. Allows the public to subscribe to its shares 
2. Must have a minimum of seven persons but no maximum number prescribed. 
3. Allows the shares to be transferred 
4. Must end with “PLC”. 
5. It can sue and be sued in its own name 
6. It has limited liability – i.e. the liability of share holders is limited to the amount contributed to the company. 
7. It has perpetual existence – the death or withdrawal of some members will not affect the existence of the company. 
8. It must follow some special formalities before registration 
9. It is required by statute to keep certain prescribed books of account 
10. The owners which are the shareholders are separated from the management. 

Evaluation: 

Distinguish between a private and a public limited liability company 

SUB-TOPIC 3: FORMATION OF A LIMITED LIABILITY COMPANY. 

The steps taken in the formation of a limited liability company are as follows: 

1. The first step involves getting the promoters. The promoters are individuals who conceived the idea of the company and undertook to fulfil the legal requirements for the venture. 
2. The promoters are required to deduce a way of getting the initial capital bearing in mind the cost of formation, assets to be bought and working capital
3. The promoters should secure the services of a lawyer and an accountant to prepare certain documents to be filled with the Registrar of companies at the Corporation. The documents are:

1. Memorandum of Association
2. Articles of Association
3. Statement of Nominal Capital

1. The documents are stamped and lodged with the registrar of companies. 

Memorandum of Association 

This is the document containing rules and regulations which govern the external relationship of a company with outsiders. It also serves as a constitution of the company and defines its objectives and powers in respect to its dealings with the outside world.

It contains the following 

1. The name of the company ending with the word “Limited”/PLC. 
2. The location/address of the registered office of the company. 
3. The object clause of the company 
4. The proposed amount of the authorized capital and the various shares into which it is divided. 
5. A statement indicating that the liabilities of the shareholders are limited. 
6. The names of the founders/promoters of the company and the number of shares taken up by them. 
7. Status of the company that is public or private 
8. The restriction on the power of the company if any. 

ARTICLES OF ASSOCIATION 

This is the document containing the regulations governing the internal management of the company’s affairs, duties, rights and powers of the members. It is also a document in which the internal regulations of Limited Liability Company are stated. 

The contents of an article of association include: 

1. The method of issue of capital 
2. Methods of holding meetings 
3. Defined powers and duties of directors 
4. The right of shareholders 
5. How directors are to be elected 
6. How auditors are to be remunerated 
7. Method of sharing dividend 
8. Transfer and forfeiture of shares 
9. Method of audit 
10. Method of settling dispute.
11. Procedure for winding up the company in the event of liquidation.

Certificate of registration or incorporation 

This is the document which confers legal status on the company to commence business. It is issued by the registrar of companies as evidence that all the requirements of the Acts in respect to registration have been met by the company. 

It contains the following information: 

1. The name of the company 
2. The company registration number 
3. A statement showing that the company has been registered in accordance with the law
4. The signature of the registrar

Prospectus 

This is a circular, or an invitation or advertisement made by a company to the public, inviting them to subscribe in a company’s shares. 

It contains the following information: 

1. Brief history of the company 
2. Information about the present position and future prospect 
3. The purpose of the issue 
4. The amount of the capital offered for subscriptions 
5. The terms of the issue 
6. Three to five years audited accounts 
7. Profiles of the major shareholders 
8. Profiles of the company’s directors 
9. Profiles of the company management team 
10. The accountant reports 
11. Particulars projections for three to five years 
12. Application form 

Certificate of Trading 

This is the document which allows the company to commence business activities. It is issue to a public limited liability company to commence operation after the company has been given the certificate of incorporation. 

Evaluation 

1. State the steps to be followed in the formation of a limited liability company. 
2. Write short notes on 

(i) Articles of Association (ii) Memorandum of Association (iii) prospectus 

General Evaluation 

Objective Test: 

1. The maximum membership of a private company is (a) 2 (b) 10 (c) 50 (d) infinity 
2. The document that guides a company’s internal operation is called (a) Articles of Association (b) Memorandum of Association  (c) cash book (d) prospectus 
3. The document which allows the company to commence business activities is called ____ (a) Certificate of trading (b) prospectus (c) certificate of incorporation (d) Articles of Association 

Essay Test: 

1. Write short notes on (i) Articles of Association (ii) Memorandum of Association (iii) prospectus

2. State the characteristics of a public limited liability company 
3. State six contents of a memorandum of Association 
4. State the differences and similarities between a private and public company. 

Weekend Assignment 

Read Commerce for Senior Secondary Schools Book 2 by P.S. Onuka et al page 39-46 

Pre-Reading Assignment 

Read sources of capital for Limited Liability Companies, and advantages and Disadvantages of Limited Liability Company. 

Weekend Activity: 

List 5 sources of capital for Limited Liability Company 

What are advantage and disadvantages of Limited Company? 

Reference Texts 

Commerce for Senior Secondary Schools book 2 by P.S. Onuka et al – Melrose books.