Edited By Sarah Owoeye and Jennifer Demian
Third Term
Week 6
Subject: Commerce
Class: SS1
Topic: Limited Liability Companies 2 (Sources of capital and liquidation)
Instructional Materials: Memorandum, article of association and shares certificate.
Content:
Table of Contents
Sources of Finance Available to Public and Private Limited Liability Companies
Public limited liability companies, also known as joint-stock companies, require significant capital to fund their large-scale operations.
These companies have access to a wide range of financing options, both internal and external, to support their business activities.
A private limited liability company is a type of business entity that is privately owned and has a separate legal identity from its owners.
The liability of each shareholder is limited to the amount they invested in the company, meaning their personal assets are protected in case the company incurs debt or is sued.
The following are sources of finance for public and private limited liability companies:
1. Bank Loans and Overdrafts
These companies can obtain short-term and long-term loans from commercial or development banks.
Overdrafts allow them to withdraw more money than is available in their account, helping to manage temporary cash flow shortages.
2. Issuance of Shares
A public limited company can raise substantial capital by selling shares to the public through the stock exchange. Investors who purchase these shares become part-owners of the company.
3. Sale Of Debentures
Debentures are long-term debt instruments that companies issue to the public. Investors lend money to the company in exchange for a fixed interest rate over a specified period. Unlike shares, debenture holders are not owners of the company.
4. Bills of Exchange
This is a financial instrument where the company’s debtor signs a promise to pay a fixed amount to the creditor. It can be discounted with a bank for immediate cash before maturity.
5. Equipment Leasing
Instead of purchasing expensive machinery or equipment outright, companies can lease them.
Alternatively, the company may lease out some of its own equipment, thereby generating income.
6. Retained Earnings (Ploughed Back Profits)
Public companies often reinvest a portion of their past profits into the business rather than distributing all earnings as dividends. This is a cost-effective way to finance expansion without borrowing.
7. Trade Credit
Suppliers may allow the company to purchase goods (especially raw materials) and defer payment to a later date. This helps the company operate without immediate cash outflow.
8. Hire Purchase
In a hire purchase arrangement, the company can acquire assets by paying in instalments. Ownership transfers after the final payment, making this a useful option for acquiring costly equipment.
9. Factoring
Factoring involves selling a company’s receivables (debts owed by customers) to a third party (a factoring company) at a discount in exchange for immediate cash.
10. Government Grants and Subsidies
In certain sectors like agriculture or manufacturing, governments may provide grants or subsidies to public companies to support development or promote exports.
11. Issue Of Preference Shares
Preference shares are another way to raise capital. Holders receive fixed dividends and have priority over ordinary shareholders in asset distribution during liquidation.
Liquidation or Winding Up of a Company
Liquidation refers to the formal process of dissolving a company and bringing its operations to an end.
This involves selling off the company’s assets, settling debts, and distributing any remaining funds to shareholders. It can occur when a company completes its objectives, cannot pay its debts, or decides to cease operations.
Forms of Company Liquidation
1. Voluntary Liquidation
This occurs when the shareholders of a company pass a resolution to wind up the business. Reasons may include the achievement of the company’s goal or continuous financial losses.
2. Voluntary Liquidation Under Court Supervision
Sometimes, shareholders may choose to liquidate the company voluntarily but request court oversight. This ensures transparency, especially if there are disputes among members or creditors.
3. Compulsory Liquidation
This is enforced by a court order, usually at the request of creditors, shareholders, or regulators. It may happen due to insolvency, inability to raise capital, or failure to comply with legal requirements.
4. Court-Ordered Dissolution Without Formal Liquidation
A company may be shut down by court order if it is found to be operating for unlawful or fraudulent purposes, even if formal liquidation does not take place.
5. Removal f Company Register
The Registrar of Companies may strike a company’s name off the register if it fails to meet certain requirements, such as filing returns or maintaining a minimum number of shareholders.
6. Insufficient Shareholders
If the number of shareholders drops below the legally required minimum (usually two for private companies and seven for public companies), the company may be forced to dissolve.
7. Failure to Commence Business
A company that fails to begin operations within a prescribed time (typically one year after incorporation) may be dissolved by regulatory authorities.
Read also: Large Scale Retail Trade: Types, Advantages, And Disadvantages (Part 1)
