Limited Companies
There are three distinct and important differences between companies and other forms of
business organizations. These are:
I. Limited liability- That is, the only liability or potential loss a shareholder has if the
company fails is the amount invested in the company, not the total wealth of the
shareholder.
II. Legal personality- A company is recognized in law as having a legal identity separate
from that of its owners.
III. Continuity-In a company, the death of an owner or director does not lead to its break-up
or dissolution. All that happens is that ownership continues through the inheritance of the
shares.
There are two types of companies namely:
1. Private limited companies- A small to medium size business that is owned by
shareholders who are often members of the same family. This company cannot sell
shares to the general public.
Advantages of a Private limited company
Shareholders have a limited liability.
Separate legal entity.
Continuity
Greater status than other forms of businesses
Ability to raise capital from sale of shares to family, friends and employees.
Disadvantages of a Private limited company
Legal formalities
Transferability of shares is limited
Capital cannot be raised by sale of shares to the general public
Page 1
2. Public limited company- A limited company, often a large business, with the legal
right to sell shares to the general public.
Advantages of a public limited company
Limited liability
Separate legal entity
Continuity
Access to substantial capital sources due to the ability to issue prospectus to the
public and offer shares for sale (Floatation)
Transferability of shares
Disadvantages of a public limited company
Legal formalities in formation
Risk of takeover due to the availability of shares on the stock exchange
Legal requirements concerning disclosure of information to shareholders
Fluctuation of share prices
Directors influenced by short term objectives of major investors.
Legal formalities in setting up a company
All governments insist that certain legal stages are completed before a company may be
established in order to protect investors and creditors. The following documents must be
completed.
I. Memorandum of Association- Is a document that defines the relationship of the
company to the rest of the world. It contains the following information:
Name of the company which must end with the words Public limited company
or Plc if it is a public company or Limited or Ltd if it is private.
Statement that the liability of the company is limited.
The amount of the authorized capital.
Location of the registered office.
The object clause or purpose of the company.
Page 2
A declaration of association in which the initial members (subscribers)
express their desire to form a company and to take up shares.
II. Articles of Association- Is a document that defines the rights and duties of a
company’s shareholders and directors. It contains:
Regulations for calling meetings of shareholders
Members voting rights
Forfeiture of shares by members who fail to pay amounts called upon
them.
Appointment of directors to manage the company
The role of the company secretary
The conduct of general meetings of shareholders
The conduct of board meetings
The requirements for minutes of board and general meetings
The keeping, publishing and auditing of the company’s accounts.
Page 3
