Limited Liability Company
Limited liability means that investors or shareholders are not liable for debts incurred by the company beyond the amounts invested. In other words, a limited liability company is one in which the shareholders have limited liability toward the company’s debts. Limited companies are either private or public limited companies.
Characteristics of Private Limited Company
Companies in general have common characteristics. However, individual countries may include in their Companies Act, specific clauses given, given their particular needs. Therefore, more large scale business activities can be undertaken. In Jamaica, for example, the Companies Act of 1907 guides the operations of companies.
A Private Limited Company is financed through the funds of
· Private individuals such as members of a family who sometimes are the main persons involved in the business.
· Financial institutions
· Government agencies established to provide assistance with business ventures.
· Retained profits.
· The shareholders have limited liability
· The company must be registered with the registrar of companies.
· The name of the company must include the word ‘limited’ (Ltd)
· A private limited company, by law, must have a minimum of two members and a maximum of 50 or more shareholders with exceptions for some type of private businesses.
· A private limited company cannot seek to raise capital financing through the issue of shares to the public.
· The accounting records must be properly kept to facilitate inspection by the relevant authorities
· Accounts must also be audited.
Advantages of a Private Limited Company
· A private limited company is a separate entity from the persons who actually invest in it.
· The company has an unlimited life. For example, years after some founding members have moved on, the company can still be operational.
· The company has a larger capital financial base than a sole proprietorship, for example, therefore more large scale business activities can be undertaken.
· The shareholders have unlimited liability.
Disadvantages of a Private Limited Company
· The law doesn’t permit the public issuing of shares as a way of raising capital for the business.
· A company must make known or file its annual financial report with the registrar of companies.
· It is not easy for shareholders to sell their shares. As a matter of fact, shareholders may be required to sell their shares to existing members of the company.
Public Limited Liability Company
A public limited liability company is an incorporated body. This means that the business is constituted as a legal entity. In other words, the business is separate and apart from the persons who contributed to its joint stock. The public limited is also called a Joint Stock company because a number of persons contributed to its jointly held stock. A Public company may start out as a public company, or it could emerge from a private company that has ‘gone public’.
Characteristics of Public Limited Company (plc)
Funding for the establishment of a business comes through:
· Borrowing from the banks and other financial institutions or through the offering of stocks and shares to the public.
· Members of the public purchase stocks and shares from their personal savings, for example. Some companies may purchase shares from their retained earnings. Different types of shares are offered.
· Members of the company have limited liability, that is, liability is limited to the amount contributed by the investor.
· A minimum of seven persons can begin the business operations. There is no ceiling on the maximum number of investors. Generally speaking investors do not even take any active part of the day to day operations of the business. They may not even be customers of the business.
· A board of directors is elected to control the decision making of the business. Shareholders elect the board of directors. Normally, a shareholder has one vote for each share held.
· The business must be registered with the registrar of companies as dictated by the Companies Act for the documents which must be prepared and presented.
Types of shares
Preference Shares
These are offered at special rates, for example 5% preference shares, meaning that shareholders will earn a fixed amount on their investment. There are different types of preference shares. These include cumulative participating and redeemable preference shares. If a business cannot declare dividends for one reason or another, cumulative preference shareholder’s earnings, on their investments will accumulate over time. Such earnings will be honoured when the firm is in a position to do so.
Deferred Shares
These shares are also referred to as founders’ shares or management shares. Deferred shares are designed to give the founders of a business the opportunity to continue to have some in the business when the business goes public. For example, if it is a family business that is being converted into a public company, deferred shares are usually reserved for such persons. Returns on these shares, or any repayment arising from the folding of the business, are paid last. A set percentage or rate of return on investments may be agreed upon.
Ordinary Shares
These are also referred to as risk capital or equities mainly because dividends on these shares are dispersed only after all other shareholders are paid. Sometimes no dividends are declared and ordinary shareholders receive no earnings on their share investments. This happens when the business does not make a profit at all, or when the profit is too small. However, investing in ordinary shares is still a good option.
Debentures
A business may still need to earn more funding from the public over and above the amounts obtained through the sale of preference, ordinary, and deferred shares. A good way of obtaining the additional financing is offering debentures. Debentures are loans borrowed from the public at a fixed rate of interest. The returns on debentures are paid even before profits are calculated. Thus the debenture payment is an expense to the business. If the business has to close down, the debenture holders are paid before any shareholders are paid. Debentures holders are issued with a debenture certificate.
Documents for setting up a company
A) Memorandum of Association
This document states the external relationship of the company and shows the following:
· Name or title of the company
· Address of the company
· Objects clause/objectives of the company
· Limited liability statement; so plc is to be clearly indicated
· Amount of capital and the number and types of shares
· Statement of association. A minimum of two signatures to the document sign indicating that they are willing to establish such a business venture, and will, therefore, cover the cost of the shares as indicated.
B) Articles of Association
This documents sets out the constitution or internal rules and regulations of the proposed business venture. It lists and explains:
· The names of the directors and their duties
· The voting procedures
· The rules governing the conduct of meetings
· The rights of shareholders as well as the classes of shareholders
· The auditing rules
· The arrangements for sharing of profits
C) A list of directors and their written consents to take up shares’ and serve the company.
D) A statement of nominal capital- that is, how much capital, and how it is distributed. The stamp duty must be paid to the relevant government tax agency.
E) A declaration signed under oath that the Companies Act was adhered to.
When all these documents have been accurately prepared, preferably under the guidance of an attorney-at-law, and the stamp duty has been paid, the papers presented to the Registrar of companies who issues a Certificate of Incorporation. This is the legal document that gives the company the right to go into operation.
However, while the private company may start immediately, the public company must first indicate that the public issue of its shares has been a successful. This means that the minimum capital to start the business has been raised. The company will then inform the Registrar of Companies of this, as well as confirm that the directors have paid for their shares. The Registrar will then issue a certificate of trading which allows the company to start business. This certificate must be posted at a prominent place in the organization so that everyone can see it.
Failure to raise minimum capital will result in all the money subscribed by the shareholders being refunded.
To raise the capital from the public, the organization draws up a Prospectus. This document advertises the shares being offered. The following are included in the prospectus:
· Information about the proposed business venture
· Objectives of the company
· Details of the types, and amounts of shares to be sought
· Instructions in how to apply for the shares.
A company is a legal entity. Decisions and transactions are, therefore, made on behalf of the company. In the event of a serious disagreement leading to litigation, the company is sued and not its individual shareholders.
Advantages of Public Limited Companies
- They have the advantage raising large amounts of capital.
- It is easier for public limited companies to borrow money because they are larger and usually well known, so this helps to build confidence in them.
- They are more likely to achieve economies of scale because they are involved in large –scale business operations.
Disadvantages of Public Limited Companies
- They can become such large businesses that they really lose touch with their customers and even workers. This can have an adverse effect on the operations.
- They are more difficult to manage and some managers may even lose control of the many activities that are placed under their portfolio.