Business Organization (Limited Liability company)

WEEK: 3

TOPIC: BUSINESS ORGANIZATION

SUB-TOPIC: LIMITED LIABILITY COMPANY

Meaning of Limited Liability Company

A limited liability company is a form of business organisation owned by shareholders, whose liability is limited to the amount of capital they invested in the business. The company is a separate legal entity from its owners.

Definition

A limited liability company is a business organisation registered under the Companies and Allied Matters Act (CAMA), with ownership divided into shares and managed by directors.

Types of Limited Liability Company

1. Private Limited Company (Ltd)
   • Membership: 2–50 shareholders
   • Shares are not sold to the public
   • Transfer of shares is restricted
2. Public Limited Company (Plc)
   • Minimum of 7 shareholders
   • Shares are sold to the public
   • Can be quoted on the stock exchange

Features / Characteristics of Limited Liability Company

1. Separate legal entity – Company is different from its owners
2. Limited liability – Shareholders’ risk is limited to their investment
3. Perpetual succession – Company continues even if members die
4. Ownership by shareholders – Capital divided into shares
5. Management by directors – Owners do not manage daily operations
6. Large capital base – Can raise funds by issuing shares
7. Legal registration – Must be registered with CAC

Sources of Capital

• Sale of shares
• Bank loans
• Debentures
• Retained profits

Advantages of Limited Liability Company

1. Limited liability encourages investment
2. Large capital for expansion
3. Continuity of business
4. Professional management
5. Easy transfer of ownership (shares)
6. Public confidence and credibility

Disadvantages of Limited Liability Company

1. Complex and costly to set up
2. Strict government regulations
3. Separation of ownership and control
4. Lack of secrecy (published accounts)
5. Slow decision making

Differences Between Private and Public Limited Companies

Formation of an Limited Liability Company:

1. The promoters decide on a business name and check that it is available.
2. They prepare the necessary documents.
3. The company is registered with the government authority (like the Corporate Affairs Commission).
4. After registration, the company can start business.

Documents involved:

1. Memorandum of Association – states the company’s name, objectives, and type of business.
2. Articles of Association – shows the rules for running the company.
3. Certificate of Incorporation – proof that the company is legally registered.
4. Statement of Share Capital – shows how the company’s capital is divided.

Meaning of shares, stock and debentures

Shares: Shares are units of ownership in a company. When a person buys shares, they become a part-owner of the company and may receive dividends.

Stock: Stock is the total value of shares combined together. It usually refers to fully paid shares grouped into one unit.

Debentures: Debentures are long-term loans taken by a company from the public. Debenture holders are creditors, not owners, and they receive fixed interest.

Types of Shares:

1. Ordinary (Equity) Shares
2. Preference Shares

Summary: A limited liability company is an advanced form of business organisation that combines large capital, limited liability, and continuity, making it suitable for large and risky businesses, though it involves complex legal procedures.