SOURCES OF CAPITAL LIMITED LIABILITY COMPANIES ISSUES OF SHARES ORDINARY AND PREFERENCE SHARES

WEEK 2

SUBJECT: COMMERCE 

CLASS: SS 2 

TOPIC: LIMITED COMPANIES 

Content: 1. Sources of capital 

2. Advantages and disadvantages of limited Liability Companies 

SUB-TOPIC 1: SOURCES OF CAPITAL

The following are sources of capital open to limited liability companies. 

1. Loans and Overdraft: These can be obtained from the bank by the company to finance their operations 
2. Retained earnings or plough back profit – the profit made by the company can be set aside for re-investment. 
3. Credit purchase – Raw material can be purchased by the company on credit. 
4. Hire – purchase: companies can be granted hire purchase facility by the seller to acquire some of their assets. 

1. Equipment leasing – companies can lease some of their equipment from a given leaser and make payment through rental payment through rental payment. 
2. Sales of shares – public limited liability companies can raise capital by issuing shares to the public through the stock exchange 
3. Sale of debenture: – these are long – term loans obtained form the general public at a fixed interest 
4. Bill of Exchange – this is a document duly signed by debtors bank to the creditors and the creditor cashes the money with some documents. 

Shares 

A share can be defined as the unit portion of the company’s capital owned by a shareholder. It is a unit which a shareholder has in a company. 

Classes of shares 

There are basically two types of shares namely 

1. Preference shares and 
2. Ordinary shares 

Preference shares 

These are shares whose dividends are paid first and have a fixed rate of dividend. They include cumulative, participating redeemable, non-cumulative, non-participating and convertible preference shares. 

Features of Preference shares 

1. They have no voting right 
2. They have a fixed rate of interest 
3. Holders receive dividend before others 
4. They are entitled to return of capital first at winding-up 

Preference shares are of many types which include 

1. Cumulative preference share 
2. Participating preference share 
3. Redeemable preference share 
4. Convertible preference share 

Ordinary shares 

It is also called equity shares. They are the real owners of the company. They are the risk bearers and they receive dividend after all other shares have been paid. The can vote and be voted for. 

Features of Ordinary shares 

1. There is no fixed rate of dividend 
2. They have voting rights 
3. The holders are the real owners of the business 
4. They are the risks bearers 
5. They receive dividend last 
6. They can be classified into various forms such as founder share, preferred shares and stocks. 

STOCKS 

It can be defined as the bundle of shares or mass of capital which can be transferred in fractional amount. Stocks are not issued out but converted from the share which is already issued. 

EVALUATION: 

1. State five source of capital open to Limited Companies 
2. Write short notes on the following (i) shares (ii) Debenture (iii) stock (iv) bill of exchange (v) preference shares. 

Sub-Topic 2: Advantages and Disadvantages of Limited Companies 

Advantages of Private Limited Company

1. Large capital – As a result of many shareholders who form the business, it can easily raise large capital. 
2. Legal entity – it can sue or be sue in its own name case of liquidation of a company, the shareholders only their personal properties. 
3. Shareholders have limited liability. This means that in case of liquidation of a company, the shareholders only lose their shares that they have contributed and not their personal properties. 
4. Continuity of existence – The death or withdrawal of a member cannot affect the existence of the company. 
5. It enjoys some level of privacy as it does not publicise its annual accounts.
6. Efficient management – the business is efficiently managed by a board of directors appointed by the shareholders. 
7. Large profits – because of their large size, they enjoy large profits. 
8. Possibility of expansion – companies can easily expand because of the large capital available to set up and run the company. 
9. Internal economics of large scale production the cost per unit of production is low for producing large quantities. 

Disadvantages of Private Limited Liability Company 

1. Limited capital: The capital of private company may be limited because it cannot raise capital on the stock exchange. 
2. Shares are not easily transferable in a private company, without the consent of other shareholders. 
3. Shares are not sold to the public: private company cannot sell its shares to the public thereby limiting its expansion and capital base.
4. Lack of personal contact – unlike in the sole trade, there is lack of personal contact with both the employers and customers. 
5. Delay in decision taking – the board of directors or the shareholder must meet before any decision is taken resulting to waste of time. 
6. Disagreement may arise between member which may affect the company negatively.

Advantages of Public Limited Liability Company

1. Legal entity. The company is difference from the owners hence it can sue or be sued. 
2. Perpetual existence. The death or withdrawal of a shareholder cannot put an end to the business. 
3. Limited liability. Their liability is limited to the amount invested in the business. 
4. Large capital. They can raise enough capital by selling more shares and debentures to the public. 
5. Recruitment of experts. They can attract men of experts to work for it. 
6. Employees can become co-owners. Employees can become co-owners of the company by buying company’s shares. 
7. Research programmes. They have greater opportunity to undertake research programmes. 
8. Democracy in management – shareholders have the right to vote and voted for in electing the board of directors. 
9. Transfer of shares – share can be easily transferred without having effect on the business operations. 
10. Loan facilities – they can easily obtain loans from the banks 
11. Owners are separated from management. The shareholders are the owners of the company while the management is vested in the hands of the directors. 

Disadvantages of Public Limited Liability Company 

1. Lack of privacy – they lack privacy because they must publish their annual accounts to the public. 
2. Slow decision making: Before decisions are taking, both the shareholders and the board of directors are consulted. 
3. Hard to establish – The procedures and formalities involved in registration are very hard and complicated. 
4. Large capital requirement. Capital required to set up and run such company is usually very large. 
5. Lack of flexibility – The Company can only carry on business provided for it in the Memorandum of Association. 
6. Decrease in personal interest. There is lack of personal interest in this type of company unlike in the sole-proprietorship. 
7. Payment of large corporate tax. They are made to compulsorily pay tax based on the profit made. 
8. Separation of owners from control. The shareholders have little to say in the running of the company unlike in the case of one-man business. 

Evaluation 

Discuss the advantages and disadvantages of a joint stock company over a sole proprietorship. 

General evaluation 

Objective Test 

1. Which of the following is not a normal source of loan finance for a limited liability company? (a) Debenture loans (b) loans from friends and relatives (c) bank loans (d) A & C 
2. The following are types of preference shares except: (a) cumulative (b) participating (c) redeemable (d) ordinary 
3. Ordinary shares could be classified into ___ (a) 2 (b) 3 (c) 4 (d) 5 
4. The  following are advantages of public limited liability company except (a) legal entity (b) large capital (c) perpetual existence (d) lack of privacy 

Essay Test 

1. List and explain 5 sources of capital open to a public Limited company. 
2. Write short notes on the following  (i) cumulative preference share  (ii) participating preference share (iii) redeemable preference share 
3. Compare (in a tabular form) the difference between a private share (i) transfer of shares (ii) issue of debenture (iii) issue of shares to the public (iv) listing shares in the stock exchange 
4. Discuss five disadvantages of private limited liability company. 

Weekend Assignment 

Read Commerce for Senior Secondary Schools Book 2 by P.S. Onuka et al page 39-56. 

“Sources of Capital for Limited Liability Companies”

1. Which type of share gives the holder exclusive voting rights and a guaranteed dividend, but has no claim on assets if the company is liquidated?

a) Ordinary shares

b) Preference shares

c) Debentures

d) None of the above

2. What is the primary source of capital for a limited liability company, allowing it to fund its operations and expansion?

a) Ordinary shares

b) Preference shares

c) Bank loans and overdrafts

d) Retained earnings or plough back profit

3. Which type of share typically gives the holder a smaller dividend than ordinary shares, but with superior rights in terms of control and liquidation proceeds?

a) Ordinary shares

b) Preference shares

c) Debentures

d) None of the above

4. What type of capital can a limited liability company obtain by purchasing raw materials on credit from suppliers, allowing it to avoid paying upfront costs?

a) Ordinary shares

b) Preference shares

c) Bank loans and overdrafts

d) Credit purchase of raw materials

5. What is the main disadvantage of limited liability companies, as compared to other types of business structures such as sole proprietorships or partnerships?

a) Ordinary shares

b) Preference shares

c) Difficulties in obtaining capital from external sources

d) None of the above

6. Which factor may limit a company’s ability to obtain financing for expansion or operations, and thus affect its overall financial health?

a) Ordinary shares

b) Preference shares

c) Credit history and credit score of company owners

d) Lack of adequate internal controls and procedures

7. Which factor may make a limited liability company an attractive option for investors or lenders, due to the increased degree of protection it offers?

a) Ordinary shares

b) Preference shares

c) Limited liability to company owners

d) All of the above

8. Which type of capital structure may increase a limited liability company’s likelihood of success, due to its ability to adapt quickly and flexibly?

a) Ordinary shares b) Preference shares c) Bank loans and overdrafts d) None of the above

9. What is one potential disadvantage of relying heavily on borrowed funds such as bank loans or overdrafts?

a) Ordinary shares b) Preference shares c) Difficulties in managing cash flow

d) Increased risk of default and bankruptcy

10. Which type of capital structure may give a limited liability company an edge in terms of competitiveness by allowing it to spend more on marketing and other business activities?

a) Ordinary shares b) Preference shares c) Retained earnings or plough back profit d) None of the above

Pre-Reading Assignment 

Read Trade Associations and other Enterprises 

Weekend Activity 

1. (a) Define chamber of commerce (b) state five necessary reasons to support their formations. 

Reference Texts 

Commerce for Senior Secondary Schools Book 2 by P.S. Onuka et al. Melrose Books and Publishers.