A company is a collaborative effort among individuals who consolidate their capital to create and manage a separate business entity distinct from its owners.
Documents Involved in Company Formation
Here are the essential documents required for the formation of a company:
- Memorandum of Association: It defines the company’s relationship with the external world and contains crucial information like company name, location, objectives, etc.
- Articles of Association: This establishes internal rules and regulations governing the company’s management and operations.
- Certificate of Incorporation: A Certificate of Incorporation is issued by the Registrar of Companies. It confirms the company’s legal existence after incorporation.
- Prospectus: It is a document inviting the public to subscribe to or purchase shares or debentures of a company.
- Underwriting: Underwriting involves entities agreeing to take up unsubscribed shares offered to the public by a company.
- Certificate of Trading: The Registrar of Companies grants the certificate of trading to a public company to allow it to commence business operations and exercise borrowing powers.
Types of Company Capital
Every business undoubtedly requires capital to get up and running. The same applies to the running of a company. There are basically four types of company capital:
- Registered, nominal, or authorized capital: This is the maximum amount stated in the memorandum of association, deemed sufficient for the company’s establishment and operations.
- Issued Capital: It is the portion of the authorized capital actually issued or allocated to members of the public for subscription.
- Called-Up Capital: It is the amount of issued capital that directors have deemed necessary to be collected or called up from shareholders.
- Reserved Capital: It is the capital not yet called up by the company and considered unlikely to be called up in the foreseeable future by the directors.
Types of Companies
The following are types of companies:
- Unlimited Liability Companies
- Unlimited Liability Companies By Guarantee
- Limited Liability Companies By Shares
Unlimited Liability Companies
Unlimited Liability Companies refer to business structures where the owners (partners or shareholders) are personally liable for all the company’s debts and obligations. This means their personal assets can be used to cover the company’s liabilities, and there’s no legal separation between the company’s finances and the owners’ finances. This structure exposes owners to significant risk as their personal wealth is at stake in the case of business debts or legal issues.
Unlimited Liability Companies By Guarantee
Here, those who establish the company commit to contributing additional capital if the company incurs debts. This extra capital aims to offset or cover the company’s liabilities beyond its assets.
Limited Liability Companies By Shares
Limited Liability Companies (LLCs) are a business structure that combines elements of a corporation and a partnership or sole proprietorship. They offer limited liability to their owners (often called “members”), meaning the owners’ personal assets are typically protected in the event of the company’s debts or legal actions. This structure provides flexibility in management while safeguarding the owners’ personal assets from business liabilities.
Limited Liability Companies (LLCs) offer protection to their owners (members or shareholders) by limiting their liability to the extent of their investment in the company. Here, shareholders constitute the owners, and their liabilities are restricted to the nominal value of their shares.
There are two kinds of limited liability companies, namely, private limited liability companies and public limited liability companies.
- Private Limited Liability Company: It requires a minimum of two individuals and allows for a maximum of fifty members. It is suited for smaller ventures or businesses aiming for a more controlled membership structure.
- Public Limited Liability Company: It requires a minimum of seven individuals and has no specific maximum limit on members. A public limited liability company is designed for larger-scale operations and is open to the public for investment. It is often listed on stock exchanges for public trading.
Comparison of Public and Private Limited Liability Companies
| Features | Public Limited Liability Company | Private Limited Liability Company |
|---|---|---|
| Minimum Number of Persons | 7 | 2 |
| Maximum Number of Members | No limit | 50 |
| Capital Source | Raises capital from the public | Does not raise capital publicly |
| Share Transferability | Shares are freely transferable | Capital cannot be transferred without consent |
| Ownership and Control | Owned by shareholders, controlled by the board of directors | Owned and controlled by contributors during formation |
Advantages of Limited Liability Companies
- Legal Entity: A limited liability company exists as a separate legal entity, distinct from its owners, enabling it to enter contracts, sue, and be sued.
- Large Capital: It allows for easier access to capital through shares, attracting investors for business expansion.
- Continuity: A limited liability company assures continuity beyond the lifespan of its owners, ensuring stability and longevity.
- Capital Transfer: A limited liability company facilitates the transfer of ownership through share transfer without disrupting operations.
- Unlimited Expansion: There is no ceiling on growth potential. This enables expansion and diversification without constraints.
- Limited Liability for Shareholders: This protects business shareholders from personal liability beyond their investment in the company.
- Ownership Separation from Management: The LLC separates ownership from day-to-day management to ensure professional management practices.
- Employee Ownership Opportunities: It provides avenues for employees to become co-owners.
- Shareholder Interest Protection: Structures and regulations safeguard the interests of shareholders by ensuring fair treatment.
- Scale of Production: It allows for large-scale production due to enhanced access to capital and resources.
- Division of Labour: It enables the application of specialized skills through division of labour to improve efficiency.
- Democratic Management: It allows for democratic decision-making processes within the management structure, thereby fostering participation and diverse perspectives.
Disadvantages of Limited Liability Companies
- Complex Establishment: It requires intricate legal procedures and documentation, making the setup process challenging.
- Capital Requirements: It demands substantial initial capital investment, potentially limiting entry for smaller ventures.
- Diminished Personal Interest: Owners’ personal connection to the company might decrease due to its larger structure and complexity.
- Lack of privacy: Company details and operations are often subject to public disclosure, compromising privacy.
- Inflexibility: Structured processes and regulations might hinder swift adaptation to changing business environments.
- Inhibited Individual Initiatives: Collective decision-making might discourage individual innovation or entrepreneurial initiatives.
- Policy and Decision-Making Delays: Hierarchical decision-making processes might lead to slower policy implementation and decision-making.
- Ownership separation from management: The separation of ownership and management can lead to conflicting interests between stakeholders.
- Potential Disagreements: Conflicts may arise between shareholders and the board of directors, impacting company direction.
- Strained Employer-Employee Relationships: The company’s size and formal structure might hinder fostering a close relationship between employers and employees.