A Limited Liability Company can be defined as a legal business entity created by a number of people in accordance with the law. Example of Limited Liability Companies in Nigeria are Nestle Foods Plc, Seven Up Bottling Plc etc.
TYPES OF LIMITED LIABILITY COMPANY
There are three types of Limited Liability Companies which are as follows;
1) Company Limited by Shares: The liability of the members is limited to the full value of shares they have acquired.
2) Company Limited by Guarantee: They are not formed to engage in trading activities but to promote and develop certain interest or profession.
3) Unlimited Company: The liability of a member is unlimited and he may be liable to the full amount of the company’s debt in case of liquidation.
CHARACTERISTICS OF LIMITED LIABILITY COMPANY
1) It is a legal entity
2) It has perpetual succession
3) Ownership is separated from management
4) A limited liability company must follow some special formalities before registration
5) They must prepare annual accounts i.e. statement of accounts yearly.
6) The liability of the shareholders is limited to the amount contributed or agreed.
TYPES OF LIMITED LIABILITY COMPANY
There are two types of Limited Liability Company; they are Private Limited Liability Company and Public Liability Company.
PRIVATE LIMITED COMPANY
Section 28 of the Company Act 1968 defines private liability company as one which by the articles
(a) Restricts the right to transfer its shares
(b) Limits the number of its members from two to fifty
(c) Prohibits any invitation to the public to subscribe to its shares
(d) The name of the private company must end with Limited.
PUBLIC LIABILITY COMPANY
Public Liability Company is defined by the section of the company Act 1968 as one which by its articles.
(a) Allows its shares to be transferred
(b) Allows the public to subscribe to its shares
(c) Must end its name with ‘PLC’
(d) Minimum number of seven members but no maximum number
DIFFERENCES BETWEEN PRIVATE AND PUBLIC LIMITED LIABILITY COMPANY
|1||The minimum number of member is two and a maximum of fifty||The minimum number of member is seven and the maximum is infinity|
|2||The public is not allowed to subscribe to its shares||The public is allowed to subscribe to its shares|
|3||Private companies are small in size||Public companies are large in size|
|4||Their shares are not quoted on the stock exchange market||Their shares are quoted on the stock exchange market|
FORMATION OF A LIMITED LIABILITY COMPANY
The steps in the formation of a limited liability company are as follows;
STEP 1 – The promoter(s) devises a scheme of capitalization.
STEP 2 – The promoter(s) is required to prepare certain documents through solicitors.
STEP 3 – The documents are stamped and lodged with the registrar of companies.
STEP 4 – After going through the documents and certified to be ok the registrar of companies then issues a certificate of incorporation to the company.
STEP 5 – A private limited liability company can commence business once it obtains a certificate of incorporation but a public limited liability company cannot commence until it receives the certificate of trading.
DOCUMENTS USED BY LIMITED LIABILITY COMPANIES
MEMORANDUM OF ASSOCIATION: Memorandum of Association is a document which forms the constitution of the company and defining its objectives and powers with regards to its dealing with the outside world.
ARTICLES OF ASSOCIATION: This is a document of regulations which govern the internal management of the company’s affairs.
PROSPECTUS: Prospectus is a document issued by the public companies, inviting the public to subscribe for shares of the company.
CERTIFICATE OF INCORPORATION: Certificate of Incorporation confers legal status on the company to commence business and it is issued by the registrar of companies.
CERTIFICATE OF TRADING: Certificate of Trading allows the company to commence business activity. It is issued to Public Liability Company.
ADVANTAGES OF LIMITED LIABILITY COMPANY
1) Limited liability companies have legal existence i.e. they are legal entity
2) They have perpetual existence
3) Large capital can be raised through the sales of shares or debentures to the public.
4) Shares of a Public Limited Company can be easily transferred without having an effect on the business organization.
5) It is democratic in nature.
6) They have sufficient capital for expansion
DISADVANTAGES OF LIMITED LIABILITY COMPANY
1) There is lack of privacy as its audited accounts must be published for the general public.
2) Payment of large corporation tax.
3) Huge and heavy amount of capital is required for formation.
4) The procedure and formalities involved for establishment are complicated.
5) Ownership is separated from management.
6) Decision making is slow because of wider consultation by the Board of Directors
SOURCES OF CAPITAL FOR LIMITED LIABILITY COMPANY
1) Sales of shares to the general public
2) Bank loans and overdrafts, Limited Liability Company can easily raise loan from banks because it mostly has the required capital.
3) Equipment leasing. It could lease equipment on credit and pay at a later day.
4) Retained profit. The company may decide to reinvest profit realized for a trading year in the following year.
5) Trade credit.
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