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LIMITED LIABILITY COMPANIES

Commerce (SS)

A company is an artificial person which is recognized in law as a separate legal entity. It is also referred to as joint stock Company that makes profit by producing or selling goods and services. It can only act though its organs like the board of directors and shareholders.

NOTE: A company is an artificial entity recognized in law as having personality in the sense that it may be a party to the legal relationship. Examples are Zenith bank plc. Nigeria breweries plc and Flour mill plc.

 

KINDS OF COMPANIES

The following are the three kinds of companies:

  1. COMPANIES LIMITED BY GUARANTEES: These are companies having the liability of its members limited by the memorandum of association to the amount they undertake to contribute to the assets of the company to meet its liability at the time of winding up.
  2. UNLIMITED COMPANIES: These are companies having to limit to liability of members in the event of liquidation members will be liable to the full amount of liability e.g oil prospecting companies in the event of liquidation, members properties to be sold to offset its liabilities.
  3. COMPANY LIABILITIES BY SHARES: These are companies having the liabilities of members limited by the memorandum of association to the amount of unpaid on their shares at the time of winding up.

 

CHARACTERISTICS OF A LIMITED LIABILITY COMPANY

(a). LEGAL PERSONALITY: A limited liability company has all the attribute of a person. The fundamental attribute of cooperate personality is that the company is a legal entity distinct from its members. It can sue and be sued.

(b). LIMITED LIABILITY: The liability of members is limited to the amount of shares held in the company.

(c). PERPETUAL SUCCESSION: The company can exist for a long period. The death of a member will not affect the existence of the company once registered become an entity different from the owner.

(d). SEPARATION OF OWNERSHIP FROM MANAGEMENT: Here the ownership is separated from the management. The management of a registered company is the responsibility of the board of directors, shareholders cannot interfere.

(e). REGISTRATION WITH THE CORPORATE AFFAIRS COMMISSION: A company must follow some special formalities before registration with the corporate affairs commission.

(f). PUBLICATION OF ANNUAL ACCOUNT: The financial statements should be prepared, audited and published in the dailies annually.

(g). ACCESS TO CAPITAL INVESTMENT: It is very easy for a company to raise more capital by means of subscription for members of the public.

(h). RETAINED EARNINGS: A limited liability company can plough back part of its profit and the rest will be distributed as divide end.

 

TYPES OF LIMITED LIABILTY COMPANY

A company limited by shares may be:

  1. Private limited liability Company.
  2. Public limited liability Company.

 

  1. PRIVATE LIMITED LIABILIES COMPANY: A private company is formed by an association of specific number of people. It is defined by section 22 of CAMA 1990 as a company, which by its Articles limits the number of its members to fifty and restricts the right to transfer its shares. Example is Adebowale Electrical Limited.

 

FEATURES OF PRIVATE COMPANY

  1. It must be stated in its memorandum to be a private company.
  2. Restricts the transfers of its shares.
  3. Two to fifty people are required to set it up.
  4. It prohibits any invitation to the public to subscribe to its shares.
  5. Appointment of directors may be done in a simple way.
  6. Its shares are not quoted on the stock exchange market.
  7. PUBLIC LIMITED LIABILITY COMPANY: This is any other company that does not qualify under the private company. Sections of CAMA defined it ‘as a company which allows the public to subscribe to its shares and whose shares are transferable. Examples are Total Plc and UBA Plc.

 

FEATURES OF A PUBLIC COMPANY 

  1. The word “public” must be stated in the memorandum.
  2. Does not restrict the right to transfer its shares.
  3. It must be formed by at least seven people but no limit to number of shareholders.
  4. It can place invitation to the public to subscribe for any shares of the company.
  5. It must publish its annual accounts.
  6. Its shares are quoted on the stock market.

 

FORMATION AND REGISTRATION PROCEDURES

There is more formality attached to the formation and operation of a company than to other business units. In turning a company, the promoters will follow the companies and Allied Matters Decree of 1990.

 

CONDITIONS FOR INCORPORATION OF LIMITED LIABILITY COMPANY UNDER CAMA 1990

PROMOTER: This is a person who carries out the necessary preliminary work in the formation of a company.

 

PREPARATIONS OF MEMORANDUM OF ASSOCIATION

Memorandum of Association is the constitution of a company, which governs the relationship of a company with the outside world. It contains the regulations of the company in connection with its dealing with the outside world.

CONTENTS OF MEMORANDUM OF ASSOCIATION

  1. NAME OF THE COMPANY: The name of the company will be stated and followed by the word ‘limited’ or ‘ltd’.
  2. THE OBJECTS OF THE COMPANY: It will set out the object of the company. The reason for the formation and the kind of business to be embarked upon should be stated.
  3. LIMITED LIABILITY: It will be expressly stated that the liability of numbers will be limited to the amount invested.
  4. AMOUNT OF AUTHORIZED CAPITAL: The memorandum will state the total value of nominal capital which the company is registered.
  5. STATUS OF THE COMPANY: It will state the states of the company whether a private or public.
  6. REGISTERED OFFICE: The registered office of the company should be stated i.e, the head office address.

 

PREPARATION OF ARTICLES OF ASSOCIATION

This is a document, which prescribes the rules and regulations governing the internal working of the company. It contains the internal rules for conducting the business of the company. It may be altered with the agreement of majority shareholders.

 

CONTENTS OF ARTICLES OF ASSOCIATION

  1. Right of shareholders.
  2. Remuneration of auditors.
  3. Conduct of general meeting.
  4. Names and powers of directors.
  5. Appointment of directors.
  6. Transfer and forfeiture of shares.
  7. Auditing of accounts.
  8. Payment of dividends.

SOURCES OF FINANCE

  1. Bank overdraft.
  2. Commercial paper.
  3. Trade credits.
  4. Bill discounting.
  5. Bank Loan.
  6. Hire purchase.
  7. Venture capital.
  8. Equipment leasing.
  9. Issues of debenture stocks.
  10. Retained earnings.
  11. Fresh issue of shares.

 

  DISADVANTAGE OF LIMITED LIABILTY COMPANY

 

  1. Lack of privacy in financial reporting.
  2. Slow decision-making process.
  3. Separation of ownership from management.
  4. Subject to many legal restriction.
  5. High taxation.
  6. Requirement of too much documentation.
  7. Conflict of interest between shareholder and directors.
  8. High cost of preliminary expenses.
  9. Inflexibility in business operation.

 

KEY TERMS

CERTIFICATE OF INCORPORATION

 This is a document by the register of companies after all necessary documents have been drawn and submitted. This gives the company legal existence once a company is incorporated, it has legal status that is it has become a person in the eyes of the law and is distinct form its shareholders. The company is said to have separate legal personality.

CERTIFICATE OF TRADING

This is a certificate given to a company to commence trading after it has been issued with the certificate of incorporation public liability companies can only commence operation after it has received the certificate of trading. Private companies can commence operation immediately it is issued with the certificate of incorporation.

                                ASSIGNMENT

  1. State the content of article of association
  2. Differentiate between certificate of incorporation and certificate of trading

 

See also

PUBLIC ENTERPRISES

ECONOMIC GROUPINGS IN WEST AFRICA

PRIVATIZATION /COMMERCIALIZATION

INDIGENIZATION

NATIONALIZATION

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