LIMITED LIABILITY COMPANIES
ECONOMICS

LIMITED LIABILITY COMPANIES

DEFINITION OF A COMPANY

A company can be defined as a legal person or entity created by the association of a number of people in accordance with the law for the purpose of pooling their capital together in order to set up a business venture. Examples of limited liability companies are Dunlop Nigeria Plc ., Guinness Nigeria Plc ., C.F.A.O. Nigeria Plc ., Julius Berger Nigeria Plc and Evan Medical Plc. A company is an artificial person and is more than a mere association of individuals. It is a legal person with a personality of its own.

 

TYPES OF COMPANIES

  1. Unlimited liability companies: In an unlimited liability company, the liability of a member is limitless and he may be liable to the full amount of the company’s debts in the event of liquidation. The members will contribute more money, including their capital, to settle the debt of the company. Section 21(1) of the Company and Allied Matters Act defines it as one not having any limit on the liability of members.
  2. Limited liability companies: In the case of limited liability companies, the liability or burden of debt in the company is limited to the amount of share capital the shareholders had agreed to contribute individually in the event of liquidation. In this case, a shareholder cannot suffer the liability of the company up to his or her private property.

 

Types of Companies Under Limited Liability Companies

  • Companies limited by guarantee: Companies limited by guarantee are not formed with the aim of engaging in trading activities or making profits. They are often formed by societies and other charitable contributions from members of the public to promote and develop certain interests or professions. The liability of its members is limited by the Memorandum of Association to such an amount as the members may have undertaken to contribute to the assets in the event of its being wound up. Guarantee companies are usually formed for the furtherance of art, science, education, religion and charity.
  • Companies limited by shares: Companies limited by shares are the companies in which the liability of the shareholders is limited to the full value of the shares they have acquired. In case of liquidation, the shareholders will only be liable to the full extent of their shares contributed as capital. They normally engage in business activities to make profit. Section 21(1) of the Company and Allied Matters Act, 1990 defined a company limited by shares as: “A Company having the liability of its members limited by memorandum to the amount, if any, unpaid on the shares held by them.”

 

TYPES OF LIMITED LIABILITY COMPANIES

  1. Private limited liability company: Private limited liability company is defined as one which by its articles restricts the right to transfer its shares, limits the number of its shareholders from two to fifty, prohibits any invitation to the public to subscribe to its shares and the name of the private company must end with “Limited”, e.g. Bluebird Nigeria Limited.
  2. Public limited liability company: Public liability company is defined as one which by its articles allows the public to subscribe to its shares, must have a minimum of seven persons but no maximum number is prescribed. It allows the shares to be transferred and the name of the public company must end with “Plc.”, e.g. Zenith Bank Plc ., Guinness Nigeria Plc ., Dunlop Nigeria Plc ., and First Bank Plc. This is the type that is popularly referred to as Joint Stock Company.

 

SIMILARITIES AND DIFFERENCES BETWEEN PRIVATE AND PUBLIC LIMITED LIABILITY COMPANIES

Similarities:

  1. Legal entity or status: Both companies are legal entities, which means that they can sue and be sued in their own names due to the fact that both are registered companies. The business name is different from the owners’ names.
  2. Limited liability: Both companies have limited liability, meaning that in the event of liquidation, the shareholders can only lose the value attached to the shares they contributed.
  3. Continuity of existence: The chances of continuity or existence of both companies are high as the death or withdrawal of a shareholder cannot affect the existence of the company.
  4. Ploughing back of profits: Part of the profit can be ploughed back into the business for both companies while the remaining can be shared to the shareholders, according to the amount of shares contributed.
  5. Large capital outlay: Both companies are capable of pooling large capital together to set up a business.
  6. Management: Both companies appoint directors for the proper and efficient management of the business.

 

Differences:

Private Limited Company

  1. Shares are not easily transferable, except with the consent of their members.
  2. Its shares are not quoted in the stock exchange.
  3. It has a minimum of two people as shareholders share.
  4. It has a maximum number of 50 owners.
  5. It does not issue debentures.
  6. They are not allowed to use “Plc”.
  7. They do not need Certificate of Trading to commence business.
  8. The public is not allowed to subscribe for its shares.
  9. They are small or medium in size and have limited capital.
  10. It is owned and controlled by those who contributed the capital.
  11. It enjoys some level of privacy as it does not publish its annual account.

 

Public Limited Company

  1. Shares are easily transferable.
  2. Shares are quoted in the stock exchange.
  3. It has a minimum number of seven people as holders.
  4. It has no maximum number of people as owners.
  5. It issues debentures.
  6. They are allowed to use the abbreviation but “Ltd”or “Unltd” “Plc” – Public Liability Company.
  7. They need Certificate of Trading before they can commence business, commence business.
  8. The public is allowed to subscribe for its shares.
  9. They are large in size and have large capital.
  10. It is owned by the shareholders and controlled by the board of directors selected by them.
  11. There is no privacy as the annual account publicise its annual accounts. must be published.

 

FORMATION OFA LIMITED LIABILITY COMPANY

The steps involved in the formation of a limited liability company (be it private or public limited company) are as follows:

Steps 1: The promoter(s) devise a scheme of capitalisation, bearing in mind the cost of formation, assets to be bought and working capital.

 

Steps 2: The promoter(s) are required to secure the services of a solicitor to prepare certain documents to be filed with the registrar of companies. The documents are:

  • Memorandum of Association.
  • Article of Association.
  • Statement of Nominal Capital.

 

Step 3: The documents are stamped and lodged with the registrar of companies.

 

Memorandum of Association

Memorandum of Association is a document forming the constitution of a company and defining its objectives and powers with regard to its dealing with the outside world. It is the document containing the rules and regulations which govern the external relationship of a company with outsiders. Once registered, the memorandum becomes a public document.

 

A Memorandum of Association contains the following information:

  • The name of the company, which must end with the word “Limited” or “Plc”
  • The registered office of the company.
  • The objectives of the company.
  • The amount of authorised capital and the various shares into which it is divided.
  • A declaration that the liability of the members are limited.
  • The names of founders of the company.
  • Status of the company, that is, private or public.
  • The restriction, if any, on the power of the company.

 

Articles of Association

Articles of Association is a document in which the regulations which govern the internal management of the company’s affairs, the duties, rights and powers of the shareholders are stated. It complements the memorandum of association. However, where there is conflict between the two documents, the memorandum prevails.

 

The contents of an Article of Association include:

  • The method of issuing capital.
  • The method of holding meetings.
  • Definition of powers and duties of directors.
  • The right of shareholders.
  • How directors are to be elected.
  • How auditors are to be remunerated.
  • Method of sharing dividend.
  • Transfer and forfeiture.
  • Method of auditing the account of the business.

 

Prospectus

A prospectus is a document issued by the public limited companies only inviting the public to subscribe for shares of the company. A copy of such a prospectus, signed by the directors or proposed directors in writing, must be filed with the registrar of companies. The Company Act defines it as: “Any notice, circular, advertisement which invite the public for subscription or purchase of shares of a company.”

 

Content of a prospectus

The content of a prospectus include:

  • Particulars of the company’s past history.
  • Information about the present position and future prospects of the company.
  • The amount of capital offered for subscription.
  • Particulars of directors and other officials.
  • Promoter’s remuneration.
  • The date of opening the lists.
  • The nature of capital offered for subscription.
  • Amount payable on application and allotment on each share.
  • The number of founders’ shares.

 

Step 4: After going through the documents, the registrar of companies then issues a certificate of incorporation to the company. This gives the company the powers to commence business.

 

Step 5: A private limited company can commence business after receiving the certificate of incorporation, but a public liability company cannot commence until it receives the certificate of trading.

 

Certificate of incorporation

Certificate of incorporation, which confers legal status on the company to commence business, is issued by the registrar of companies, i.e. the company has put on a veil of incorporation. The certificate is given out as an evidence that all the requirements of the Act in respect of registration have been complied with by the company and is therefore duly registered under the Act. It contains the name of the company, registration number and signature of the registrar.

The Company Act contains the effects of incorporation as:

  • Right of the company to own properties which are separated from shareholders.
  • Right of perpetual existence.
  • Right to sue and be sued.
  • Right to transfer shares.
  • Right to borrow.

 

Certificate of trading

Certificate of trading is the document which allows the public limited company to commence business activities. It is issued to a public liability company to enable it commence operation after the company has been given the certificate of incorporation. If it is a private limited company, it is at liberty to commence business immediately without the certificate of trading.

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