TYPES OF COMPANIES

Business studies study module

PRIVATE LIMITED COMPANY

Private limited company has the following characteristics;

  • Can be formed a minimum of 2 and a maximum of 50 shareholders, excluding the employees,
  • Does not advertise its shares to the public, but sells them privately to specific people
  • Restricts transfer of shares i.e. a shareholder cannot sell his/her shares freely without the consent of other shareholders.
  • Can be managed one or two directors. A big private company may however, require a board of directors
  • Can start business immediately after receiving the certificate of incorporation without necessarily having to wait for a certificate of trading.
  • It does not have an authorized minimum share capital figure.
  • Has a separate legal entity and can own property, enter into contracts, sue or be sued.
  • Has limited liability.
  • Has a perpetual existence.

Formation

-It must have a memorandum of association, article of association list of directors, declaration signed a director or lawyer and certificate of incorporation.

Advantages of private limited company

  • Formation: The Company can be formed more easily than a public company. The cost of information is less than that of a public company
  • Legal personality: A private company is a separate legal entity from its owners. Like a person, it can own property, sue or be Sued and enter into contacts
  • Limited liability: Shareholders have limited liability meaning that they are not responsible for the company’s debts beyond the amount due on the shares
  • Capital: They have access to a large pool of capital than sole proprietorship or a partnership. They can borrow money more easily from financial institutions because it owns assets which can be pledge as security
  • Management: A private company has a larger pool of professional managers than a sole proprietorship or a partnership. These managers bring in professional skills in their own areas which are of great advantage to a private company
  • Assured continuity of the business: Death, bankrupty or withdrawal of a shareholder does not affect the continuity of the company
  • Trading: Unlike a public company a private company can commence trading immediately upon receiving a registration certificate.

Disadvantages of a private company

  1. Returns: A private company, unlike sole proprietorship or a partnership, must submit annual returns on prescribed forms to the registrar of companies immediately after the annual general meeting
  2. Capital: A private company cannot invite the public to subscribe to its shares like a public limited company. It therefore limited access to a wide source of capital.
  3. Share transfer: The law restricts the transfer of shares to its members/shareholders are not free to transfer their shares

II) PUBLIC LIMITED COMPANY; –

Public limited companies have the following characteristics:

  1. Can be formed a minimum of 7(seven) shareholders and no set maximum.
  2. Cannot start business before it is issued with a certificate of trading. This is issued after the certificate of incorporation and after the company has raised a minimum amount of capital
  3. It’s managed a board of directors
  4. The shares and debentures are freely transferable from one person to another.
  5. It advertises its shares to the public/ invites the public to subscribe for/buy its shares and debentures.
  6. Must publish their end of year accounts and balance sheets
  7. Must have an authorized minimum share capital figure
  8. Has a separate legal entity and can own property, enter into contracts, sue or be sued.
  9. Has limited liability.
  10. Has a perpetual existence.

Advantages of public limited company

  1. Wide range of sources of capital :It has access to wide range of sources of capital especially through the sale of shares and debentures
  2. -They can also borrow money from financial institutions in large sums and have good security to offer to the lenders.
  3. Limited liability: Like private companies, public limited company’s shareholders have limited liability i.e. the shareholders are not liable for the company’s debts beyond the shareholders capital contribution.
  4. Specialized management: PLC’S are able to hire qualified and experie-nced professional staff.
  5. Wide choice of business opportunities: Due to large amount of capital a public company may be suitable for any type of investment
  6. Share transferability: Shares are freely transferable from one person to another and affects neither the company’s capital nor its continuity.
  7. Continuity: PLC has a continuous life as it is not affected the shareholders death, insanity, bankruptcy or transfer of shares
  8. Economies of scale: Their large size enables them to enjoy economies of scale operations. This leads to reduced costs of production which raises the levels of profit
  9. Employee’s motivation: They have schemes which enable employees to be part owners of the company which encourages them to work harder in anticipation of higher dividends and growth in the value of the company’s shares.
  10. Share of loss: Large membership and the fact that capital is divided into different classes’ means that the risk of loss is shared and spread.
  11. Shareholders are safe guarded; Publicity of company accounts safeguard against frauds.

Disadvantages of public limited companies

  1. High costs of formation: The process of registering a public company is expensive and lengthy. Some of the costs of information are legal costs, registration fees and taxes
  2. Legal restrictions: A public company must comply with many legal requirements making its operations inflexible and rigid
  3. Alienation of owners: Shareholders non-participation in management is a disadvantage to them
  4. Lack of secrecy: The public limited companies are required law to submit annual returns and accounts to the registrar of companies denying the company the benefit of keeping its affairs secret. They are also required to publish their end of year accounts and balance sheets.
  5. Conflicts of interests: Directors may have personal interests that may conflict with those of the company. This may lead to mismanagement.
  6. Decision making; Important decision are made the directors and shareholders. The directors and shareholders meet after long periods which make decision making slow/delayed and expensive.
  7. Diseconomies of scale: The large size and nature of business operations of public limited companies may result in high running/operation costs and inefficiency
  8. Double taxation: There is double taxation since the company is fixed and dividends distributed to the shareholders are also taxed
  9. Inflexibility: Public limited companies cannot easily change its nature of business in response to the changing circumstances in the market. All shareholders must be consulted and agree.



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