Limited liability companies (joint stock companies)

Business studies study module

 A company; Is an association of persons registered under the companies act who contribute capital in order to carry out business with a view of making a profit.

The act of registering a company is referred to as incorporation. Incorporation creates an organization that is separate and distinct from the person forming it.

-A company is a legal entity that has the status of an ‘’artificial person”.   It therefore has most of the rights and obligations of a human being. A company can therefore do the following;

  • Own property
  • Enter into contracts in its own name.
  • Borrow money.
  • Hire and fire employees.
  • Sue and be sued on its own right.
  • Form subordinate agencies, ie, agencies under its authority.
  • Disseminate or spread information.

The owners (members) of a company are referred to as shareholders


A company in an artificial person and has the same rights as a natural person. It can therefore sue and be sued in a court of law, own property and enter into contracts in its own name.

The members have limited liabilities.

Companies have perpetual life which is independent of the lives of its owners. Death, insanity or bankruptcy of a member does not affect the existence of the company. (this is referred to as  perpetual existence or perpetual succession)

– A company is created for a particular purpose or purposes.


-People who wish to form company are referred to as promoters

The promoters submit the following documents to the registrar of companies:

i) Memorandum of Association

-This is a document that defines the relationship between the company and the outsiders. It contains the following:

a)Name of the company/Name clause; -The name of the company must be started and should end with the word “Limited” (Ltd).This indicates that the liability of the company is limited.

-Some companies end their names with “PLC” which stands for “Public limited company” which makes the public aware that although it is a limited liability company it is a public not private.

b)The objects of the company/objective clause;-This set out the activities that the company should engage in

-The activities listed in this clause serve as a warning to outsiders that the company is authorized in these activities only.

c)Situation clause;-Every company must have a registered office where official notices and other communication can be received and sent

d)Capital clause;-It also states that the amount of capital which the business can raise and the divisions of this capital into units of equal value called shares i.e. authorized share capital also called registered or nominal share capital.

-It also specifies the types of shares and the value of each share

e) Declaration clause:-This is a declaration signed the promoters stating that they wish to form the company and undertake to buy shares in the proposed firm

-The declaration is signed a minimum of seven promoters for public limited company and a minimum of two for private company.

-The memorandum of association also contains the names of the promoters

-The promoters signs against the memorandum showing details of their names, addresses, occupation and shares they intend to buy. Each signatory should agree to take at least one share.

  1. Articles of Association

-This is a document that governs the internal operations of the company

-It also contains rules and regulations affecting the shareholders in relation to the company and in relation to the shareholders themselves.

-It contains the following;

  • Rights of each type of shareholder e.g. voting rights
  • Methods of calling meeting and procedures
  • Rules governing election of officials such as chairman of the company, directors and auditors
  • Rules regarding preparation and auditing of accounts
  • Powers, duties and rights of directors
  • Methods dealing with any alterations on the capital.

-A list of directors with details of their names, addresses, occupations, shares subscribed and statements of agreement to serve as directors

-Declaration that registration requirements as laid down law (the companies act) have been met. The declaration must be signed the secretary or a director or a lawyer.

-A statement signed the directors stating that they have agreed to act as directors.

-A statement of share capital- this statement gives the amount of capital that the company wishes to raise and its subdivision into shares.

-Once the above documents are ready, they are submitted the promoters to the registrar of companies. On approval the Registrar and on payment of a registration fee, a certificate of incorporation (certificate of registration) is issued

-The certificate of incorporation gives the company a separate legal entity.

Sources of capital

Shares; The main source of capital for any company is the sale of shares.

-A share is a unit of capital in a company e.g. if a company states that its capital is ksh.100,000 divided into equal shares of ksh.10 each.

-Each shareholder is entitled to the company’s profit proportionate to the number of shares he/she holds in the company.

Types of shares:

  1. Ordinary shares
  2. Preference shares

Ordinary shares;-Ordinary shares have the following rights:

  • Have voting rights
  • Have no fixed rate of dividends. The dividends on them vary according to the amounts of profit made
  • They have a claim to dividends after the preference shares
  • If the company is being liquidated, they are paid last after the preference shares

Preference shares;-They have the following characteristics;

  • Have a fixed rate of sharing profits(dividends)
  • Have a prior claim to dividends over the ordinary shares
  • Have no voting rights
  • Can be redeemable or irredeemable. Redeemable shares are the ones that can be bought back the company at a future date while irredeemable ones are ones that cannot be bought back
  • Can be cumulative or non-cumulative. Cumulative shares are the ones that are entitled to dividends whether the company makes profit or not. This means if the company makes a loss or a profit which is not enough for dividends in a certain year, the dividends to cumulative shares are carried forward to the next year(s) when enough profit are made

-Non- cumulative shares are the ones whose dividends are not carried forward to the following year(s)

  1. Debentures

This refers to loans from the public to a company or an acknowledgement of a debt a company

They carry fixed rate of interest which is payable whether profit are made or not.

They are issued to the public in the same way as shares.

They can be redeemable or irredeemable.

Redeemable debentures are usually secured against the company’s assets in which case they termed as secured debentures or mortgaged debentures.

NB: Where no security is given, the debentures are called unsecured /naked debentures.

3.    Loans from bank and other financial institutions;-A company can borrow long term or short term loans from banks and other money lending institutions such as Industrial and Commercial Development Corporation [I.C.D.C]

These loans are repayable with interest of the agreed rates.

4.    Profits ploughed back;-A company may decide to set aside part of the profit made to be used for specified or general purposes instead of sharing out all the profit as dividends. This money is referred to as a reserve.

5.    Bank overdraft;-A customer to a bank may make arrangements with the bank to be allowed to withdraw more money than he/she has in the account.

6.    Leasing and renting of property.

7.    Goods brought on credit.

8.    Acquiring property through hire purchase

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