Edited by Olatunji Eunice and Olorundare Oluwapelumi
Table of Contents
Lesson Objectives
By the end of this lesson, students should be able to:
- Define a company.
- Identify the different types of companies.
- Explain the types of limited liability companies.
- State the similarities and differences between private and public limited liability companies.
- Describe the steps involved in forming a limited liability company.
Definition of a Company
A company is a type of business organisation that is legally formed by a group of individuals who come together to carry out commercial or industrial activities.
It is recognised by law as a separate legal entity, meaning it can own assets, enter into contracts, sue and be sued in its own name, separate from its owners.
One of the key features of a company is that it provides limited liability to its shareholders, which means that the personal assets of the owners are protected in case the company faces financial losses.
A company must be officially registered, usually with a government agency such as the Corporate Affairs Commission (CAC) in Nigeria, before it can operate legally.
Types of Companies
Unlimited Liability Companies
An unlimited liability company is a type of company where the owners are personally responsible for all the debts of the business.
If the company goes bankrupt, the personal assets of the shareholders can be used to pay off the company’s debts. This type is less common because it carries a higher risk for the owners.
Companies Limited by Guarantee
A company limited by guarantee is usually not formed for profit-making purposes. Instead, it is often used for charitable, educational, religious, or social purposes.
In this type of company, members do not invest money through shares but instead agree to pay a small amount if the company winds up (closes down). These companies do not distribute profits to members and are often registered as non-profits or non-governmental organisations (NGOs).
However, this lesson will focus on Limited Liability Companies, which are the most popular in the business world.
Types of Limited Liability Companies
There are two main types of limited liability companies:
Private Limited Liability Company (LTD)
A private limited liability company is a type of business that is privately owned by a small group of people, usually between 2 and 50 shareholders. The company is legally separate from its owners, and each owner (called a shareholder) is only responsible for the amount of money they invested in the business.
One important feature is that shares of a private limited company cannot be sold to the public on the stock exchange. This means that ownership remains within a small group—often family members or close business partners.
The name of a private limited company usually ends with “Limited” or “Ltd”. This type of company is common among small to medium-sized businesses that want legal protection without making their shares public.
Public Limited Liability Company (PLC)
A Public Limited Liability Company is a much larger type of business that is owned by the general public through the purchase of shares. It must have a minimum of 7 shareholders, but there is no maximum limit to how many people can own part of the company.
Unlike a private company, a public limited company can sell its shares to the public on the stock exchange, which allows it to raise large amounts of capital. These companies are often national or international businesses with large operations.
The name of a public company usually ends with “Plc,” such as “Nestle Nigeria Plc” or “GTBank Plc.”
They are required to publish their financial reports so that investors can know how the company is performing. Public companies are usually more strictly regulated than private ones.
Similarities between Private and Public Limited Liability Companies
1. Both are Separate Legal Entities
Private and public limited liability companies are recognised by law as independent legal entities. This means they are separate from the individuals who own or run them.
The company itself can enter into contracts, own assets, and sue or be sued in its own name. This separation protects the personal identity and finances of the shareholders and allows the company to exist continuously, even if the ownership changes.
2. Owners have Limited Liability
In both types of companies, shareholders enjoy limited liability. This means that their personal responsibility for the company’s debts is limited only to the amount they have invested in the business.
If the company runs into financial trouble, the personal assets of the shareholders (such as houses or cars) are protected and cannot be used to settle the company’s debts.
3. Can own Property and Sue or be Sued
Private and public limited liability companies have the legal power to own land, buildings, vehicles, and other types of property. They can also take legal action against others and be taken to court themselves.
This is possible because the law treats them as separate “persons” with rights and responsibilities.
4. Formed under the Companies and Allied Matters Act (CAMA)
Both types of limited liability companies are established following the same legal framework, which in Nigeria is the Companies and Allied Matters Act (CAMA).
This law outlines the rules and procedures for registering and operating companies, regardless of whether they are private or public. It ensures standardisation and proper governance of all corporate bodies.
Differences between Private and Public Limited Liability Companies
| Private Ltd. Co. | Public Ltd. Co. |
| Cannot raise capital by selling shares to the public | Can raise capital by offering shares to the public |
| Owned by a few individuals (2–50 shareholders) | Owned by many people (minimum 7, no maximum) |
| Cannot list on stock exchange | Listed on stock exchange |
| Ends with “Ltd” (e.g., XYZ Nigeria Ltd) | Ends with “Plc” (e.g., Dangote Cement Plc) |
| Shares are not freely transferable | Shares are freely transferable on the stock exchange |
| Less regulated and not required to publish accounts | Highly regulated and must publish audited accounts |
| Decisions are made faster due to fewer owners | Slower decision-making due to more owners and procedures |
Formation of a Limited Liability Company
To form a limited liability company in Nigeria (or in any WASSCE country), the following steps are followed:
Step 1: Name Reservation
The first step in forming a limited liability company is to choose and reserve a unique name for the business. The name must not be identical or too similar to an existing registered company.
The proposed name is submitted to the Corporate Affairs Commission (CAC) or relevant government body for approval. Once approved, the name is reserved for a specific period (usually 30–60 days), giving the founders time to complete other registration steps.
Step 2: Prepare Documents
After reserving the name, the next step is to prepare the key legal documents that define the company’s structure and operations.
These include the Memorandum of Association (MoA), which states the objectives of the company and the types of business activities it will engage in, and the Articles of Association (AoA), which outlines how the company will be managed internally, including rules about meetings, shares, directors, and voting rights.
Step 3: Filing with CAC
Once the documents are ready, they are submitted along with other required forms (like the statement of share capital and particulars of directors) to the CAC for processing.
During this step, the founders must also pay a registration fee, which varies depending on the company’s share capital. The CAC will review all submissions to ensure compliance with the law.
Step 4: Certificate of Incorporation
If the CAC is satisfied with the submitted documents and fees, it will register the company and issue a Certificate of Incorporation. This certificate is proof that the company now legally exists.
At this point, the company becomes a separate legal entity from its owners. It can enter contracts, own property, sue or be sued, and carry out business activities in its own name.
Step 5: Start Business Operations
After incorporation, the company can begin full business operations. It should open a corporate bank account, obtain any necessary licenses or tax identification numbers, and start trading.
Public limited liability companies may also need to meet additional requirements such as publishing a prospectus or being listed on the stock exchange before they can raise money from the public.
Lesson Summary
- A company is a legally registered business that exists separately from its owners and can own property, sue, and be sued.
- The main types of companies include limited liability companies and unlimited liability companies.
- Limited liability companies are either Private (Ltd) with 2–50 shareholders or Public (Plc) with 7 or more shareholders that can sell shares to the public.
- Both are legal entities with limited liability, but public companies can sell shares to the public and have more shareholders, while private companies cannot.
- To form a limited liability company, one must reserve a name, prepare documents, register with the Corporate Affairs Commission (CAC), and obtain a certificate of incorporation.
Read also: Similarities And Differences Between Retail Cooperative Society And Public Limited Company
