A Limited Liability Company is an expansion of the partnership principle. It aims at securing a better method of mobilizing financial resources. The company comes into existence when a number of persons join together to invest their money in a common enterprise.
The liability of each investor for the debts of the business is limited to the amount of his capital invested in the company. The profits of the company are distributed in proportion to the shares subscribed and paid for.
The limited liability company is owned and controlled by the shareholders. Each shareholder receives a share of the profits called the Dividend.
Limited Liability Companies are of two types the private liability company and the public limited liability company or the joint-stock company. The two types are essentially the same.
The major difference between them is that in private limited liability company, the number of owners who are shareholders ranges from two to fifty.
In public limited liability company, the minimum number of shareholders is seven and there is no maximum number. In addition, private limited liability company is called private or closed because purchase of shares is restricted to only the founders.
In contrast, public limited liability company is open to everybody in the society who is interested in the ownership of the company.
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Characteristics of Limited Liability Company
1. Number of Shareholders: For private limited liability company, the number of shareholders ranges from two to fifty. For public limited liability company, the number of shareholders starts from seven and there is no maximum.
2. Separate Legal Entity: The business is a separate legal entity. It is recognized as a personality in law. The business can sue and be sued in its own name, without involving the owners. It is registered as a corporate body.
3. Limited Liability: The shareholders have limited liability. In the event of business failure, the amount which a shareholder can lose is limited to his share or capital he has invested in the business. His personal assets are protected by the law.
4. Continuity of Business: The withdrawal or death of a shareholder may not affect the existence of the company.
5. Board of Directors: There is a Board of Directors who controls the business of taking most of the major day-to-day decisions.
6. Acquisition of Capital: Capital is raised through the issue of shares. Capital can also be raised through borrowing from financial institutions and issuing debentures.
7. Publication of Accounts: Corporate business organisation must have its account publicized usually annually. It must submit an audited balance sheet to the Registrar of Companies for inspection.
Formation of a Limited Liability Company
The formation of a Limited Liability Company involves the following steps:
1. Filing of Documents with the Registrar: The first step involves filing documents with the Registrar of Companies. Such documents include:
i. Memorandum of Association
ii. Articles of Association
iii. Names of the company directors
iv. Letter of Undertaking
The Memorandum of Association will include:
i. The relationship of the company with the outside world
ii. Name of the company
iii. The business addresses
iv. Objectives of the company
v. The nature of the shareholders’ liabilities
vi The amount and type of shareholders’ capital, etc.
The Articles of Association give the rules and regulations guiding the operation of the company. The document provides information on the following areas:
i. The duties, rights, and position of each member of the company
ii. Method of the appointment of directors
iii. The rights and powers of the directors
iv. How dividends are to be shared
v. How general meetings are to be held
vi. Method of electing directors
vii. Voting rights of shareholders during elections
viii. Method of auditing the account of the company
2. Certificate of Incorporation: The second step after the preparation and submission of the documents to the Registrar of Companies involves the preparation of a Certificate of Incorporation.
If the Registrar is satisfied that the business has met the necessary requirements for company formation, the Registrar will then issue a Certificate of Incorporation. The certificate shows that the business has been recognized as a legal entity.
3. Submission of Company Prospectus: The third step is the submission of the company prospectus to the Registrar of Companies. The prospectus shows how the company has raised or wants to raise its capital.
4. Certificate of Trading: The last step is the preparation of a Certificate of Trading by the Registrar of Companies. The business can start functioning as soon as they receive the trading certificate from the Registrar of Companies. All these legal procedures are necessary in order to protect the interested shareholders from being defrauded by a group of dubious people.
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Advantages of Limited Liability Company
1. Legal Entity: The business has a separate legal entity, distinct from the owners, allowing it to sue and be sued in its own right.
2. Limited Liability: In the event of business failure, the maximum loss a shareholder faces is limited to the capital they contributed, with personal assets protected by law.
3. Large Capital: Due to the large number of shareholders, the business has access to significant capital and can easily borrow money, using its assets as collateral.
4. Sure of Continuity: The business continues to operate even if a shareholder dies or becomes ill, as these misfortunes do not affect the company’s existence.
5. Transfer of Capital: Shares in a public Limited Liability Company can be easily transferred for cash, allowing shareholders to move their capital if dissatisfied.
6. Specialisation is Possible: The division of labor is feasible due to the large workforce, with the organization divided into various departments, increasing efficiency.
7. Risks Reduction among Owners: Business risks are spread among a large number of shareholders, reducing the loss each individual faces in case of business failure.
Disadvantages of Limited Liability Company
1. Difficult to Establish: Due to government regulations, establishing this type of business involves complicated formalities, with numerous requirements to fulfill before registration.
2. Required Large Amount of Capital: Beyond the formalities, the company requires a substantial amount of capital to initiate its operations.
3. Delay in Decision Making: The size of the business causes delays in decision-making, as significant policy changes often require shareholder meetings or board discussions, which can be time-consuming.
4. Lack of Privacy: The law mandates the company to disclose its financial activities publicly, with essential documents and business information submitted to the Registrar of Companies and sometimes published in newspapers.
5. Ownership is Separated from Management: Since shareholders are not involved in the day-to-day management, managers may act in ways contrary to the interests of the owners, potentially leading to issues like embezzlement.
6. Lack of Cordial Relationship between Employers and Employees: The large size of the company makes building close relationships between employers and employees difficult, and shareholders may be dispersed across the country, limiting familiarity.
7. Decrease in Personal Interest: Unlike smaller businesses, where the owner’s enthusiasm drives success, the separation between ownership and management in a Limited Liability Company can result in reduced interest and zeal.
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