CHOICE OF BUSINESS ORGANIZATION (PART 2)

CHOICE OF BUSINESS ORGANIZATION (PART 2)

Choosing a business structure is one of the most important things one must consider when starting a business. We mentioned the various business structures to include sole proprietorship, partnership, incorporated trustees, and companies. In this post we will be looking at companies as a form of business organisation.

COMPANIES.

Companies are the ultimate form of legal business and the most widely used business organization. A company is described as a commercial association of persons recognized by statute as a legal entity. It is an association under law for carrying out a particular purpose which may not necessarily be commercial or profit making but usually is.

It takes at least two persons to incorporate or form a company. There are certain advantages which companies have over other types of business organizations. These advantages are:

Perpetual succession: a company once incorporated, enjoys perpetual succession. In partnership, when one of two partners dies, that is the end of the partnership. For company where shareholders die, other persons will take over the shares.
Limited liability: when it is a company that is either limited by shares or guarantee, the liabilities of its members are thus limited. For sole proprietorship and partnership, the owners and partners have unlimited liability.
Investors for a company: investors invest in a company more than in any sole proprietorship and partnership.
Availability of funds: a company can easily approach the bank for loan.
Management: in a company the management is different from the owners.

Types of companies

Under the Companies and Allied Matters Act (CAMA) there are different types of companies

Section 21 of CAMA provides for 6 types of companies as follows:

  • Private Company Ltd By Shares
  • Private Company Ltd By Guarantee
  • Private Unlimited Company
  • Public Company Limited By Shares
  • Public Company Ltd By Guarantee
  • Public Unlimited Company.

There are also statutory companies, these are companies formed under special legislation for some public undertaking and they may be profit or non profit in nature e.g. PHCN and NTA.

There are instances where the law mandatorily requires that a company should be formed before a particular business can be carried out. This include

  • Banking business
  • Insurance business
  • Private guard
  • Mortgage business
  • Partnership of over 20 persons
  • Stock broking
  • Foreigners/Aliens

COMPANIES LIMITED BY SHARES

A company limited by shares is one having the liability of its members limited, by the memo to the amount, if any, unpaid on the shares respectively held by them. It could be either be a private of a public company.

Private companies limited by shares:

This is the most popular kind of company in use. It is a company which is stated in its memo to be a private company and which has the liability of its members limited, by the memo, to the amount, if any, left unpaid on the shares held by them.

The features of a private company, whether limited by shares or not include:

  • It must, by its articles, restrict the transferability of its shares. The members must not exceed fifty (50)
  • it must have a minimum of two (2) members but its total membership must not exceed fifty. For the purpose of the above, joint holders of shares are deemed to be a single members.
  • A private company must have an authorized minimum share capital of not less than N10, 000; of which not less than 25% of which must be subscribed to by the members at incorporation and even at all times
  • Unless authorised by law, a private company shall not/is prohibited from inviting the public to subscribe for any of its shares or debentures.
  • Unless authorised by law, such as private companies in banking businesses, a private company shall not invite the public to deposit money, for a fixed period or payable at call, whether or not bearing an interest.
  • The name of a private company limited by shares must end with LTD.
  • A private company does not need to keep certain statutory books like the Index of members
  • A private company has no restriction in the appointment of an over-age director (70yrs and above).
  • The company secretary of a private company does not need any special qualification besides the general requirement that the directors must consider him as possessing the requisite knowledge and experience to perform the function of a company secretary.
  • Private companies can use written resolutions.
  • Can appoint several directors by a single resolution.

In making a choice of business organisations, a private company limited by shares is most suitable and recommended in the following instances:

Where a small or medium sized business needs to acquire an incorporated status
Where family members and/or friends intend to carry on business with an incorporated status and no interference from outsiders
Where the capital available to start up the business is relatively small, that is, less than N500, 000
Public company limited by shares (PLC)

A public company is any company other than a private company, and which is expressed in its memo to be a public company. The liabilities of its members must be restricted by the memo to the amount, if any, left on paid on the shares respectively held by them.

Features of a public company include:

  • It can raise money from the public by offering its shares or debentures to the public and inviting them to subscribe. This makes it easier to raise funds through the capital market when it is listed on the stock exchange
  • it must have a minimum of 2 members, but there is no limit on its maximum.
  • The authorised minimum share capital of a public company shall not be less than N500,000. It must be noted that not less than 25% of the share capital must be subscribed to by the members at incorporation and even at all times.
  • Public companies can appoint an over-age director (70yrs and above) but special notice to the company must be given and the director must disclose his age.
  • The person who can be appointed the company secretary of a public company must either be a legal practitioner, chartered accountants, chartered secretaries, or a firm of any of them or must have held the office of company secretary of a public company for at least three (3) of the five (5) years immediately preceding his appointment in a public company. He must also possess requisite knowledge and experience
  • A public company must hold its statutory meeting within six month of incorporation.
  • It must publish additional notices of its AGM in newspapers and such notice must be given to all those who are entitled to receive notice.
  • The name of a public company limited by share must end with ‚ÄúPublic Limited Company (PLC).
    Cannot appoint two or more directors by a single resolution

In making a choice of business organisation, a public company limited by shares should be recommended in the following instances:

  • Where a growing medium or large scale business needs to acquire incorporated status
  • Where the capital available to start up the business is relatively large. That is N500, 000 and above
  • Where the business intends to raise capital from the public through the invitation of the public to subscribe for shares or debentures
  • Where the membership of the company is not restricted in terms of share acquisition and disposal
  • Where sector regulations require a business organisation to be a public company in order to be permitted to operate.
  • Where 50 persons or more want to join in the formation of a company as subscribers and do not intend to be joint holder of shares

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