LIMITED LIABILITY COMPANY (JOINT-STOCK COMPANY)
By: SENATHON IPIA
Meaning of Limited Liability Company (Joint-Stock Company)
A limited liability company (joint-stock company) is a business that has shares as its units of ownership.
OR
A limited liability company (joint-stock company) is a business in which the equity capital is known as shares.
Types of Limited Liability Company (Joint-Stock Company)
There are 2 types of Joint-Stock Companies (or Limited Liability Companies), namely:
1. private joint-stock company, (or private limited liability company), (or simply, private company).
2. public joint-stock company, (or public limited liability company), (or simply, public company).
Formation of a Limited Liability Company (Joint-Stock Company)
Persons that carry out the processes of forming a company are referred to as promoters of the company.
When the Corporate Affairs Commission (CAC) registers a company, the company is said to be incorporated. So, the CAC would issue Certificate of Incorporation to the promoters.
For the incorporation of a company, the CAC would require following documents:
For the incorporation of a company, the CAC would require following documents:
1. memorandum of association of the company
2. article of association of the company
Memorandum of Association (MOA)
This is a document that states what the company is all about.
OR
This is a document that describes the company.
The contents of memorandum of association include:
1. Name of the company and its registered address. {This is to identify the business and its location}
2. article of association of the company
Memorandum of Association (MOA)
This is a document that states what the company is all about.
OR
This is a document that describes the company.
The contents of memorandum of association include:
1. Name of the company and its registered address. {This is to identify the business and its location}
2. The business activities it is established to carry on, whether trading, manufacturing, or service business. {This is to state the businesses the company will do}
3. Its nominal shares capital. {This is to state the amount of money that can be raised as capital by the owners – equity capital}
4. Subscribers to the shares capital and the number of shares they subscribed to.
{This is to state the name of owners of the company and their contributions to the share capital of the company}
5. A statement of whether the company is a private company or public company.
{This is to state the type of company}
Article of Association (AOA)
This document contains the general rules guiding the operations of a limited liability company and defines the roles and responsibilities of the directors.
This document is like the constitution of the company.
Hint: “Article” is used to mean rules guiding the operations of an organization.
The contents of article of association include:
1. Classes of shares the company can issue, such as ordinary shares, preference shares, etc.
2. Transfer of shares – for a public company; and restriction on the transfer of shares – for a private company
3. Powers and responsibilities of the directors and their limit.
4. Voting right of the members i.e. the shareholders and their pre-emptive right.
5. Annual general meeting (AGM) of the company.
Shareholders of Private Company
For a private company, its shareholders are restricted to those already mentioned in the memorandum of association, when the company was registered with the Corporate Affairs Commission – members of the public are NOT permitted to buy the shares. The shareholders are legal entities, whether natural persons, or artificial persons, or both. That is, private individuals and private corporate organizations.
Shareholders of Public Company
But a for a public a company, after registration by the CAC, and after meeting the requirements of the Securities and Exchange Commission on share issue, the promoters would be allowed to invite members of the public to subscribe to company’s shares – that is, to buy the company’s shares, and become among the owners of the company – the shareholders of the company.
It is because members of the public can buy the company’s shares, that is why is referred to as a public company – it is NOT because it is a government’s company.
When shares are offered for sale to the members of the public by a company, it is termed “Initial Public Offer” (IPO). A person that buys IPO shares buys from the company and the money goes to the company as part of the share capital of the company. But if a person buys shares from an existing shareholder, it is termed “Transfer of shares” between shareholders – the money goes to the shareholder that sold the shares, not the company. Shares transfer is otherwise known as stock exchange – it happens with the shares of public companies, not private companies.
The shareholders of a public company are legal entities, whether natural persons, or artificial persons, or both. That is, private individuals and private corporate organizations can be shareholders of a public company. Even government can be a shareholder in a public company.
Note: Money capital raised by a company from selling shares is known as share capital. Share capital is the equity capital of the business – since it is capital contributed by the owners – the shareholders
Types of Shareholders
There could be 2 types of shareholders in a limited liability company, namely:
1. ordinary shareholders, who are the owners of the company, and bear the greatest risk of the business.
2. preference shareholders, who enjoy preferential treatment but are NOT the owners of the business.
4. Voting right of the members i.e. the shareholders and their pre-emptive right.
5. Annual general meeting (AGM) of the company.
Shareholders of Private Company
For a private company, its shareholders are restricted to those already mentioned in the memorandum of association, when the company was registered with the Corporate Affairs Commission – members of the public are NOT permitted to buy the shares. The shareholders are legal entities, whether natural persons, or artificial persons, or both. That is, private individuals and private corporate organizations.
Shareholders of Public Company
But a for a public a company, after registration by the CAC, and after meeting the requirements of the Securities and Exchange Commission on share issue, the promoters would be allowed to invite members of the public to subscribe to company’s shares – that is, to buy the company’s shares, and become among the owners of the company – the shareholders of the company.
It is because members of the public can buy the company’s shares, that is why is referred to as a public company – it is NOT because it is a government’s company.
When shares are offered for sale to the members of the public by a company, it is termed “Initial Public Offer” (IPO). A person that buys IPO shares buys from the company and the money goes to the company as part of the share capital of the company. But if a person buys shares from an existing shareholder, it is termed “Transfer of shares” between shareholders – the money goes to the shareholder that sold the shares, not the company. Shares transfer is otherwise known as stock exchange – it happens with the shares of public companies, not private companies.
The shareholders of a public company are legal entities, whether natural persons, or artificial persons, or both. That is, private individuals and private corporate organizations can be shareholders of a public company. Even government can be a shareholder in a public company.
Note: Money capital raised by a company from selling shares is known as share capital. Share capital is the equity capital of the business – since it is capital contributed by the owners – the shareholders
Types of Shareholders
There could be 2 types of shareholders in a limited liability company, namely:
1. ordinary shareholders, who are the owners of the company, and bear the greatest risk of the business.
2. preference shareholders, who enjoy preferential treatment but are NOT the owners of the business.
Directors of a Limited Liability Company
From the word “direct” comes the name “director”.
A director is therefore a person that directs the management and other employees on how a business should be run. That is, a director directs how a business should be managed.
The directors of a business appoint managers, whom they direct on how to run the business. The managers in turn run the business with other employees. Sometimes, a director or some directors may participate in the day-to-day running of the business (i.e. daily management of the business).
In many companies, the designation “managing director” is used to refer to the director that engages in the day-to-day running of a company, and also doubles as the CEO.
1. Directors of a Public Company
For a public limited liability company, the shareholders are many – may be in thousands or in millions. Though, being the owners, it is impossible for all the thousands or millions of shareholders to be involved in the management of the company, so they rather elect between 2, and may be 15 shareholders, from among themselves to act as directors, on their behalf. This is somewhat democratic.
If they are 15 directors, for example, some would be executive directors and others would be non-executive directors. By executive director, it means a director working daily in the company; and by non-executive director, it means a director who does NOT work daily in company.
All the directors put together are referred to as board of directors.
Now the board of directors controls the company. They appoint managers and other employees, whom they direct on how to manage the company.
Note that managers who run the business are themselves employees – they may not be shareholders.
This means there is separation of control, management, and ownership of a public company.
That is, control – by directors; management – by managers; ownership – by shareholders.
2. Directors of a Private Company
For a private company with few shareholders, may be between 2 – 10 shareholders, these few shareholders are also referred to as directors of the private company – they are so few that they are also referred to as directors. A private company may have employees too; whom the directors direct as far as managing the business is concerned.
Characteristics/Features of a Joint-stock Company (Limited Liability Company)
Features common to both private liability company and public limited liability company are:
1. Shareholders: Owners of a limited liability are known as shareholders.
2. Limited Liability by shares (or simply Limited liability): The liability of the shareholders (owners) is limited to the amount contributed as share capital, or unpaid amount for the company’s shares already subscribed to. This also means that the debts of a company can only be paid from the company’s own assets
3. Legal entity: The law recognizes a limited liability company as a legal entity.
4. Separate legal entity from its owners: A limited liability company can enter into contract in its own name, as well as sue and be sued in its own name.
5. Perpetual existence: The death of one of its shareholders (one of its owners) does NOT stop its continuity. The business continues to exist so long as it keeps making profits and there is no new law that stops its continuous existence.
From the word “direct” comes the name “director”.
A director is therefore a person that directs the management and other employees on how a business should be run. That is, a director directs how a business should be managed.
The directors of a business appoint managers, whom they direct on how to run the business. The managers in turn run the business with other employees. Sometimes, a director or some directors may participate in the day-to-day running of the business (i.e. daily management of the business).
In many companies, the designation “managing director” is used to refer to the director that engages in the day-to-day running of a company, and also doubles as the CEO.
1. Directors of a Public Company
For a public limited liability company, the shareholders are many – may be in thousands or in millions. Though, being the owners, it is impossible for all the thousands or millions of shareholders to be involved in the management of the company, so they rather elect between 2, and may be 15 shareholders, from among themselves to act as directors, on their behalf. This is somewhat democratic.
If they are 15 directors, for example, some would be executive directors and others would be non-executive directors. By executive director, it means a director working daily in the company; and by non-executive director, it means a director who does NOT work daily in company.
All the directors put together are referred to as board of directors.
Now the board of directors controls the company. They appoint managers and other employees, whom they direct on how to manage the company.
Note that managers who run the business are themselves employees – they may not be shareholders.
This means there is separation of control, management, and ownership of a public company.
That is, control – by directors; management – by managers; ownership – by shareholders.
2. Directors of a Private Company
For a private company with few shareholders, may be between 2 – 10 shareholders, these few shareholders are also referred to as directors of the private company – they are so few that they are also referred to as directors. A private company may have employees too; whom the directors direct as far as managing the business is concerned.
Characteristics/Features of a Joint-stock Company (Limited Liability Company)
Features common to both private liability company and public limited liability company are:
1. Shareholders: Owners of a limited liability are known as shareholders.
2. Limited Liability by shares (or simply Limited liability): The liability of the shareholders (owners) is limited to the amount contributed as share capital, or unpaid amount for the company’s shares already subscribed to. This also means that the debts of a company can only be paid from the company’s own assets
3. Legal entity: The law recognizes a limited liability company as a legal entity.
4. Separate legal entity from its owners: A limited liability company can enter into contract in its own name, as well as sue and be sued in its own name.
5. Perpetual existence: The death of one of its shareholders (one of its owners) does NOT stop its continuity. The business continues to exist so long as it keeps making profits and there is no new law that stops its continuous existence.
Advantages of Joint Stock company
(i) Shareholders of a limited liability company have limited liability.
(ii) There is continuity of existence, even if a shareholder dies.
(iii) A joint-stock company has access to larger capital through sales of shares, issue of debentures, etc.
(iv) It is a separate legal entity, which makes it possible for the enterprise to sue and be sued in its own name.
(v) It enjoys internal economies since it can produce on a large scale.
(vi) A joint stock company can employ professional and skill workers.
(vii) There is transfer of shares from one shareholder to another, for a public limited company (a plc).
Disadvantages of Joint Stock company
(i) There is high cost of incorporation. The cost of registering a limited liability company with the Corporate Affairs Commission is higher compared to other forms of business organization.
(ii) Delay in decision making due to the size of a joint-stock company.
(iii) Separation of ownership from management. The managers (who run the business), being different from shareholders (the owners), may NOT pursue the shareholders’ interest – the owner’s interest.
(iv) Less flexibility arising from size.
(ii) There is continuity of existence, even if a shareholder dies.
(iii) A joint-stock company has access to larger capital through sales of shares, issue of debentures, etc.
(iv) It is a separate legal entity, which makes it possible for the enterprise to sue and be sued in its own name.
(v) It enjoys internal economies since it can produce on a large scale.
(vi) A joint stock company can employ professional and skill workers.
(vii) There is transfer of shares from one shareholder to another, for a public limited company (a plc).
Disadvantages of Joint Stock company
(i) There is high cost of incorporation. The cost of registering a limited liability company with the Corporate Affairs Commission is higher compared to other forms of business organization.
(ii) Delay in decision making due to the size of a joint-stock company.
(iii) Separation of ownership from management. The managers (who run the business), being different from shareholders (the owners), may NOT pursue the shareholders’ interest – the owner’s interest.
(iv) Less flexibility arising from size.
THANK YOU
For more, send e-mail to: senaipia@gmail.com, or call: +234 (0) 7052802574
Senathon Ipia is a Chartered Accountant with the Institute of Chartered Accountants of Nigeria (ICAN).
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