Understanding Everything On Limited Liability Companies and Their Importance

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Limited liability companies are legal entities or artificial persons formed by a group of individuals in accordance with the law to achieve a specific objective.

Unlike a simple group of people, a company has its own legal identity. Some examples of registered companies in Nigeria include Nestlé Foods PLC, Cadbury PLC, and Guinness PLC.

Types Of Companies

Under the Companies Act of 1968 (now guided by the Companies and Allied Matters Act, 1990), there are three main types of companies:

1. Company Limited by Shares (Limited Liability Company)

In this type of company, the liability of each member is limited to the amount they invested in the form of shares.

This means that if the company goes into liquidation, members will only lose the amount they have contributed and will not be personally responsible for the company’s debts.

These types of companies typically engage in profit-making business activities. Section 21(1) of the Companies and Allied Matters Act (CAMA) defines it as a company where members’ liability is limited to any unpaid amount on their shares.

2. Company Limited By Guarantee

This type of company is usually not formed for profit-making but rather for promoting arts, religion, education, or charitable purposes.

Members do not contribute capital through shares; instead, they agree to pay a specific amount if the company is wound up. The liability is limited to this guaranteed amount as stated in the Memorandum of Association.

3. Unlimited Company

In an unlimited company, members’ liability is not limited. If the company faces debts or is liquidated, members may be required to use personal funds beyond their original capital contributions to pay off the company’s debts.

According to Section 21(1) of CAMA, this type of company has no restriction on members’ liability.

Types Of Limited Liability Companies

Limited liability companies are categorised into two main types:

1. Private Limited Liability Company
2. Public Limited Liability Company

1. Private Limited Liability Company

According to Section 28 of the Companies Act of 1968, a private limited liability company is defined by the following features outlined in its Articles of Association:

• It restricts the transfer of its shares.
• It limits the number of its members to a minimum of 2 and a maximum of 50.
• It does not allow the public to subscribe to its shares.
• Its name must end with the word “Limited” (e.g., Newswatch Nigeria Limited).

Procedures For Forming A Private Limited Liability Company

To form a private limited liability company, the following steps are involved:

• Application for name search and reservation
• Preparation of the Memorandum and Articles of Association
• Preparation of declaration and other necessary documents
• Filing the required documents with the Corporate Affairs Commission (Registrar of Companies)
• Assessment of the documents for appropriate registration fees
• Payment of registration fees
• Collection of the Certificate of Incorporation

2. Public Limited Liability Company

A public limited liability company is defined in the Companies Act of 1968 as a company that meets the following conditions:

• It permits the general public to subscribe to its shares.
• It must have a minimum of seven members, with no limit on the maximum number.
• Its shares are freely transferable.
• The company’s name must end with “PLC” (e.g., First Bank PLC, Union Bank PLC).

Steps In Forming A Limited Liability Company

Step 1: Capitalization Planning

The promoter(s) must develop a capitalisation plan. This involves estimating the costs of setting up the company, acquiring assets, and providing sufficient working capital.

Step 2: Engagement Of A Legal Practitioner

The promoter(s) must engage a solicitor (lawyer) to prepare the necessary documents for registration. These documents include:

• Memorandum of Association
• Articles of Association
• Statement of Nominal Capital

Memorandum Of Association

The Memorandum of Association is a foundational document that outlines the company’s constitution and defines its external powers and objectives.

It governs the company’s dealings with the public and becomes a public document upon registration.

Contents Of The Memorandum Of Association

1. The name of the company (must end with “Limited” or “PLC”).
2. The address of the company’s registered office.
3. The objectives or purpose of the company.
4. The authorised share capital and its division into different classes of shares.
5. A declaration stating that members’ liabilities are limited.
6. The names of the company’s founders (subscribers) and the number of shares each has taken.
7. The status of the company whether it is private or public.
8. Any restrictions on the company’s powers, if applicable.

Articles Of Association

The Articles of Association is a document that sets out the internal rules and regulations for managing the company.

It details the rights, responsibilities, and powers of the members and directors. It complements the Memorandum of Association, but if there is any conflict between the two, the memorandum takes precedence.

Contents Of The Articles Of Association

• Procedures for issuing shares.
• Rules for conducting meetings.
• Powers and duties of the directors.
• Rights of shareholders.
• Process for electing directors.
• Method for appointing and paying auditors.
• Rules for distributing dividends.
• Guidelines for transferring or forfeiting shares.
• Method of conducting audits.

Prospectus

A prospectus is a formal invitation issued by a public limited liability company to invite the general public to purchase shares or debentures in a company.

It is typically used by public limited companies. It provides detailed information to help potential investors make informed decisions.

Purpose Of A Prospectus

• To describe the types of shares available for public subscription.

Contents Of A Prospectus

1. Brief history of the company.
2. Current business position and future prospects.
3. Auditor’s reports on past financial performance (profits, losses, and dividends).
4. Any other relevant financial or operational information to help potential investors make informed decisions.
5. Total amount of capital being offered for subscription
6. Details of directors and company officials.
7. Remuneration given to promoters.
8. Date when the share subscription list will open.
9. Type of capital offered (e.g., ordinary or preference shares).
10. Amount required upon application.
11. Number of shares allocated to the founders.

Step 3: Submission To The Registrar

The prepared documents are stamped and submitted (lodged) with the Registrar of Companies at the Corporate Affairs Commission (CAC).

Step 4: Issuance Of Certificate Of Incorporation

Once all necessary documents have been reviewed and approved, the Registrar of Companies issues a Certificate of Incorporation.

This certificate gives the company a separate legal identity and authorises it to begin operations.

Certificate Of Incorporation

1. Confirms the legal existence of the company.
2. Proves that all registration requirements under the law have been fulfilled.
3. Contains the company’s name, registration number, and the Registrar’s signature.
4. Also known as the company’s “veil of incorporation.”

Legal Effects Of Incorporation

(As stated in Section 37 of the Companies Act)

1. The company becomes a legal entity separate from its members.
2. It enjoys perpetual existence (can continue indefinitely, even after the death of its founders).
3. It can sue and be sued in its own name.
4. It can transfer shares.
5. Members enjoy limited liability.
6. The company has the right to borrow funds.

Step 5: Certificate Of Trading

The Certificate of Trading is a document issued only to public limited liability companies after incorporation, allowing them to commence business activities.

1. Public companies must receive this certificate before starting operations.
2. Private companies, however, are permitted to begin business immediately after receiving their Certificate of Incorporation, without needing a separate trading certificate.

Read also: Large Scale Retail Trade: Types, Advantages, And Disadvantages (Part 1)