LIMITED LIABILITIES COMPANIES

• A company is an association of persons who contribute

capital in order to carry out business with the aim of making
profit.
• A company is viewed by law as a separate legal entity
separate from the members who form it, therefore death,
insanity, bankruptcy or retirement of some of its members
does not affect its continuity.
• The members (owners) of a company are known as
shareholders.
 LIMITED LIABILITIES COMPANIES
• A company is regarded by the law as an artificial person,
hence just like natural persons, it can own property, enter
into contracts, sue and be sued in a court of law in its own
name.
• A company unlike natural persons can only engage in those
activities which it is authorised to engage in by terms of its
registration (acting intra vires). E.g. a company registered to
offer transport services cannot offer banking services. A
company which engages in activities which it is registered to
engage is said to acting against the law (ultra vires)
 Formation
• The people who come together to form a company are
known as promoters.
• When forming the company, promoters are expected to
come up with the following documents
• The memorandum of association
• Articles of association
 1) Memorandum of association
• This is a document which defines the relationship
between the company and the outsiders.
• Contents of the memorandum of association
• Information contained in the memorandum of association
is divided into subsections known as clauses. These are
discussed below
 a) Name clause
• It contains the name of the company.
• This name must end with the word limited (Ltd)
which indicates that the liabilities of the company are
limited.
• Some companies have their names ending with the
initials PLC which stands for public limited company.
• This indicates that it is a public company and not a
private company.
 b) The objects clause
•The objects clause stipulates the activities the
company should engage in.
•The company is therefore not authorised to
engage in any other activity other than the one
indicated in its objects clause.
•The objects clause serves as a warning to the
public that the company is only authorised to
engage in the stated activities only.
 c) Situation clause
•The situation clause indicates the location
of the registered office of the company
where official communication can be sent
to or received from.
 d) Liability clause
•This is clause which informs members of
the public that the liabilities of the
members of the company are limited.
 e) Capital clause
• This clause indicates the amount of capital the company
is required to raise and the subdivision of this capital into
smaller units of equal value known as shares.
• The amount of capital indicated in the capital clause is
known as the authorised share capital, registered capital
or nominal share capital.
• This clause also specifies the types of shares and the
value of each share
 f) Declaration clause
• This is a declaration which is signed by the promoters
stating that they wish to form the company and buy
shares in the company.
• The declaration should be signed by a minimum of
seven promoters in the case of a public limited company
and a minimum of two in the case of a private company.
 NOTE
•The memorandum also contains the names of
the promoters, their addresses, occupations and
the number of shares they intend to buy.
•Each promoter must sign against his/her details.
 2) Articles of association
•This is a document which governs the internal
operations of the company.
•It contains rules which govern the conduct of
shareholders in relation to each other and to
the company.
 Contents of the articles of association

• Rights of type of shareholders e.g. voting rights

• Methods of calling meetings e.g. a notice must be
given to each shareholder before a meeting is
called
• Rules governing the election of officials e.g. the
chairman, directors and auditors
 Contents of the articles of association
• Rules regarding the auditing of account
• A list of directors with details of their names,
addresses, occupations, number of shares they have
bought and the statement of agreement to serve as
directors.
• A declaration that registration requires as laid down
by the law have been met. The declaration must be
signed by a lawyer, secretary or a director
 Contents of the articles of association
• A statement signed by directors stating that they have
agreed to act as directors
• Once the above documents are ready, they are submitted by
the promoters to the registrar of companies for approval. If
the registrar is satisfied that the documents are correct, he
will issue a certificate of registration (certificate of
incorporation) to the company upon payment of a
registration fee.
• The certificate of incorporation makes the company a
 Sources of capital
a) Issue of shares
•This is the main source of capital for a
company.
•A share is a unit of capital for a company.
 Example
• A company may state its share capital as Ksh 10,000,000.
• But because it cannot raise all this capital from one
person, they subdivide this capital into affordable units of
equal value say Ksh 10 each.
• Each of these units is known as a share. Therefore the
company will be said to have 1,000,000 shares.
• A person becomes a member (shareholder) by buying
shares in the company.
 Example
• Shareholders are entitled to a share of profits of the
company. This share of profits are known as dividends.
• Each share is given a number. However after all shares of
a given class have been sold and fully paid for, they do
not require numbering hence they are grouped together
into to bigger units known as stocks.
• A company that deals in stocks in known as a joint stock
company.
 Types of shares
There are two types of shares:
1)Ordinary shares
2)Preference shares
 1) Ordinary shares (equity shares)
Features Of Ordinary Shares
• They have voting rights
• They have no fixed rate of returns (dividends). The
dividends paid to ordinary shareholders depends on the
profits made by the company
• They have a claim to dividends after preference shares
• They are paid last when the company is liquidated
(dissolved)
 Benefits of raising capital through sale of
ordinary shares
• The company acquires permanent capital as ordinary
shares are not redeemable
• The company is not obliged to pay dividends to ordinary
shareholders
• Rate of dividends on ordinary shares is not fixed since it
is determined by realised profits
• Ordinary shareholders are paid last when the company is
winding up
• Ordinary shares require no security
 2) Preference shares
Features Of Preference Shares
•Have a fixed rate of dividends
•Have a claim to dividends before ordinary
shares
•Have no voting rights
 2) Preference shares
Features Of Preference Shares
• Can be redeemable or irredeemable: To redeem means to buy back. Therefore
redeemable shares are the ones that can be bought back by the company at a future
date whereas irredeemable shares cannot be bought back by the company.
• Can be cumulative or non- cumulative: to cumulate means to increase by
adding. Cumulative shares therefore are the ones whose dividends keeps
accumulating until they are paid. This means that if the company makes a loss or a
profit that is not enough to pay dividends owing to cumulative preference shares
in the current year, such dividend will be carried forward to the next year (s) when
enough profits will be made. Non- cumulative shares are the ones whose
dividends are not carried forward to future years i.e. they are only entitled for
dividends in the year when dividends are declared.
 3) Debentures
• A debenture is a loan from the public to the company.
• A debenture may also refer acknowledgement of a
debt by a company.
• Debenture being loans carries interest at fixed rates
which must be paid whether the company makes profit
or not.
• Debentures are issued to the public the same way as
shares
 Types of debentures
a) Redeemable debentures
• These are debentures that can be bought back by the
company within a specified future date
b) Irredeemable
• These are debentures that cannot be bought back by
the company. They can however be redeemed when
the company is being dissolved (liquidated)
 Types of debentures
c) Mortgage ( secured) debentures
• To mortgage means to attach property as security.
• Mortgage debentures are therefore the ones to which
company property is attached (pledged) as security.
d) Naked (unsecured)debentures
• These are debentures to which no security is attached.
• They are treated the same way creditors are treated in the
event that the company is being liquidated.
 Differences between shares and debentures
Shares Debentures
A share is a unit of capital in a limited company A debenture is a loan advanced to a limited company

Shareholders are owners of the company Debenture holders are creditors of the company

Shares earn dividends Debentures earn interest

Dividends on shares are paid Interest on debentures must be

only when the company makes profit paid whether the company makes profit or not
Shares represent capital invested hence do not require Debentures are loans and security must be provided
security by the company
Shareholders have voting rights Debentures have no voting rights

Share capital cannot be withdrawn unless when the Debentures can be withdrawn at any time
company is dissolving
In case of dissolution, shareholders are paid last In case of dissolution, debenture holders are paid first
 Differences between debt financing and equity
financing
Debt financing Equity financing
Raising capital through sale of debentures) Raising capital through sale of ordinary
shares)
Usually redeemable It is a permanent source of capital

Payment of interest on finance is a legal Payment of dividends is not a legal obligation

obligation
Rate of interest on finance is fixed Rate of dividends varies with the amount of
profit realised
Involves costs such as insurance and security Does not involve such costs

It is usually secured It is not secured

 4) Loans from banks and other financial
institutions

• A company may borrow money from banks and

other financial institutions in the form of loans.
• These loans carry interest at an agreed rate.
 5) Ploughing back profits

• A company may decide not to distribute all its

profits to members in form of dividends but to set
aside part of the profits for a specific purpose.
• Profit set aside this way is known as a reserve
 6) Bank overdraft

• A backdraft is an over-withdrawal of the amount in

the account holder’s account.
• A company can arrange with its back to be allowed
overdraft facilities.
 Other Sources Of capital

7. Leasing and renting of property

8. Buying goods on credit
9. Acquiring property through hire purchase
 Features of limited liability companies

•It is a separate legal entity

•Shareholders have limited liabilities
•Most capital is raised through sale of shares
•Managed by a board of directors
 Features of limited liability companies

•Profits are shared among shareholders in the

form of dividends
•Has perpetual existence
•The procedure of formation, registration and
operation is controlled by law
 TYPES OF COMPANIES

Limited companies can be classified into two;

•Private limited company
•Public limited company
 Private limited company
Characteristics
•They are formed by a minimum of 2 and a
maximum of 50 shareholders (excluding
employees.
•It does not advertise its shares to the public. It
therefore sells them privately to specific people
 Private limited company
Characteristics
• It restricts the transfer of shares i.e. a shareholder cannot
sell his/her shares without the consent of other
shareholders
• Can be managed by one or two directors. But a big
private limited company may be managed by a board of
directors
• It can start trading immediately after receiving a
certificate of incorporation
 Advantages of a private limited company
•It is easy to form since it involves a shorter
procedure with less cost compared to a public
limited company
•It has a separate legal entity from its owners
hence it can own property, sue, be sued and
enter into contracts
•The liabilities of shareholders is limited
 Advantages of a private limited company

• It enjoys wide sources of capital

• It is in a position to hire professionals to manage it
• It starts traded immediately it receives a certificate
of incorporation
• It is assured of continuity i.e. death of a shareholder
(s) does not affect its continuity
Disadvantages of private limited companies
• It is required to submit annual returns on prescribed
forms to the registrar of companies immediately
after the annual general meeting. This may be so
involving.
• It cannot sell shares to the public. This limits its
access to more capital
• Transfer of shares is restricted
Disadvantages of private limited companies
• It is only allowed to carry activities spelt out in its
objects clause
• Shareholders do not directly control the business
since management is done by directors
• Decision making takes long since each decision
must be sanctioned by shareholders
 Public Limited Company
Characteristics
• It can be formed by a minimum of 7 shareholders and no set
maximum
• It can only start trading after being issued with a certificate of
trading.
NOTE: a certificate of trading is issued after the certificate of
incorporation. It is issued after the company has raised the
minimum amount of capital as spelt out in its capital clause.
• It is managed by a board of directors
 Public Limited Company
Characteristics
• Its shares and debentures are freely transferable from one person
to another. This may be done through a stock exchange market.
• It advertises and invites the public to subscribe (buy) to its
shares and debentures
NOTE: the advertisement inviting members of the public to
subscribe to a company’s shares and debentures is contained in a
special booklet known as the prospectus. A prospectus contains
the details of the type, amount and value of the shares or
debentures offered.
Advantages of a public limited company
•It has access to a wide range of sources of
capital
•Shareholders have limited liabilities
•It can afford to hire professionals to manage it
•It has a wide choice of business opportunities
i.e. its wide capital sources enables it to expand
operations to new markets
Advantages of a public limited company
•Shares are freely transferable
•It is assured of continuity
•It enjoys economies of large scale operations i.e.
it is able to reduce its production costs in order to
maximize profit
•Its employees are well motivated e.g. by giving
them an opportunity to buy shares in the
company
 Disadvantages of public limited companies
• Cost of formation may be high. Examples of
expenses incurred when forming a public limited
company include; legal costs, registration fees and
taxes
• It is required by law to comply with a number of
requirements e.g. filing of tax returns, maintaining a
list of all its shareholders etc.
 Disadvantages of public limited companies
• Shareholders do not have direct control over the running
of the business since management is done by a board of
directors.
• Lacks secrecy. This is because they are required by law to
publish their end year financial statements. Any member
of the public can also access these financial statements
from the registrar after payment of a small fee.
• Directors may have personal interests that may conflicts
interests of the company
 Disadvantages of public limited
companies
•Slow decision making since all major decisions
must be sanctioned by shareholders
•It may experience high costs of operation
•It is subjected to double taxation. This is
because its profits are taxed and are the
dividends distributed to its shareholders.
 Management
•Management of a private company is
determined by its size.
•A small private company may be managed by
one director known as the managing director.
•A bigger private company is managed by a
board of directors.
 Management
• A small public company can be managed by two
directors one of whom must a managing director.
• A bigger public company is managed by a board of
directors and other professional staff such as
auditors, accountants, lawyers etc.
• The directors are responsible for the formulation of
the company’s policies
 Management
•Below the directors are the professional
managers e.g. the general manager, the
marketing manager, the personnel manager and
the finance manager.
•The managers are responsible for their own
departments.
•They however take collective responsibility for
the implementation of the company’s plans.
 Differences between a private Ltd Co and i

a public Ltd Co
Private Ltd Co. Public Ltd Co
 Formed by a minimum of two and a maximum of  Formed by a minimum of seven shareholder. The
fifty shareholders maximum is controlled by the number and type of
shares
 Managed by atleast one director  Managed by atleast two directors and the
maximum is not specified

 Shares are not freely transferable i.e. any transfer  Shares are freely transferable
must be endorsed by all shareholders

 Does not advertise its shares to the public  Advertises its shares to the public

 Its audited accounts do not have to be published in  Its audited accounts must be published in the
the press press
 Differences between a public limited company
and a partnership
Public limited company Partnership
 Formed by a minimum of 7 members and no  Formed by a minimum of 2 and a maximum of 20
specified members ( except for partnerships providing
 maximum professional services whose maximum
membership is 50)

 Members have a limited liability  Partners have unlimited liability

 Managed by a board of directors  Managed by partners themselves

 Regulated by articles and memorandum of  Regulated by the partnership deed or the

association partnership act
 Pays corporation tax  Pays income tax

 Can be sued under its name  Individual partners are sued

Differences between public limited company and
a co-operative society
Co-operative society Public limited company
 It is welfare motivated  It is profit motivated
 It serves members only  It serves members and outsiders
 Formed by a minimum of 10  Formed by a minimum of 7
 members and no specified  members and no specified
 maximum  maximum
 Governed on the basis of one member one  Governed on the basis of one share one
vote vote
 Co-operates with other cooperatives  Competes with other companies
 Governed by the co-operatives act  Governed by the company’ act
 Has only one class of shareholders  Has several types of shareholder
THE STOCK EXCHANGE MARKET

•This is a market where shares of

quoted companies are bought and
sold.
 Definition of Terms
Stock: refers to a group of shares in a public
limited company.
A quoted company: this is a company that
has been registered (listed) as a member of the
stock exchange market.
Securities: refers to shares. It may also refer
to documents which support share ownership
 Definition of Terms
Initial public offer (IPO): refers to situations where a
company has floated new shares for subscription by the
public i.e. has invited the public to buy its new shares.
New shares are issued in a primary market.
Secondary market: this is a market for second hand
shares. It facilities the transfer of shares from one person
to another.
Stock broker: refers to individuals or organisations
which buy and sell shares on behalf of investors
 Definition of Terms
Investor: refers to an individual or an organisation who
intends to buy or sell shares in the stock exchange.
Jobbers: these are dealers in shares who buy and sell
shares and other securities on their own behalf with the
intention of making profit
The capital markets authority: this is an organization
established by the government to supervise and oversee
the operations of the stock exchange
 NOTE
It is only quoted companies that can have
their shares traded in the stock exchange.
The only stock exchange market in
Kenya is the Nairobi Stock Exchange.
(NSE)
 NOTE
• Apart from shares, the stock exchange may also
deal in government securities such as bonds,
treasury bills and stocks of local authorities.
• The stock exchange facilities both primary and
secondary share deals
• An investor cannot buy or sell shares directly in the
stock exchange market, he/she can only buy or sell
shares through stock brokers.
 Role played by the stock exchange market an
economy
a) Facilitates buying of shares
• The stock exchange market provides the market for
investors willing to buy shares in different quoted
companies
b) Facilitates selling of shares
• The stock exchange market provides a steady
market for those wishing to sell their securities
 Role Played by Stock Exchange Market in Economy
c) Safeguards investors’ interests
• The stock exchange market safeguards the interest of investors
by putting in place standards of performance to be attained
before a company is quoted.
• The stock exchange market also ensures that quoted companies
are observing certain set regulations
d) Provides useful information to investors
• The stock exchange market provides timely, accurate and
reliable information to enable them make investment decisions
Role Played by Stock Exchange Market in Economy
e) Enables companies raise capital
• The stock exchange market enables companies raise capital by
providing a market where they can issue shares to the public.
f) Creates employment
• Stock exchange market has created employment
opportunities for those people who facilitate the buying
and selling of shares. This may include stock brokers and
their agents.
 Role Played by Stock Exchange Market in Economy
g) Raises revenue for the government
• The government raises revenue through fees and other dues
charged on activities carried out in the stock exchange market.
The government may revenue from the stock exchange market
in the form of taxes and license fees.
h) Avails a variety of securities
• The stock exchange market fulfils the needs of different
investors by availing to them a variety of securities from
different companies
 Role Played by Stock Exchange Market in Economy
i) Fixes prices
• The stock exchange market provides an environment buyers and
sellers of securities meet to determine the prices of securities.
j) Measures a country’s economic progress
• The performance of securities in the stock exchange market
indicates a country’s economic progress. E.g. a rise in demand
and prices of securities indicates that the economy is doing well.
k) Promotes a saving culture
• Stock exchange market provides an avenue where investors can
channel their excess funds hence they save funds by investing
them in the stock exchange.
 Benefits enjoyed by a company quoted
on the stock exchange
The company can sell its shares and other
securities easily to raise capital
Interested investors can invest in different
companies by buying their shares and securities
It improves the image of the company as a
well-managed, profitable and a financially
stable company
 Benefits enjoyed by a company quoted
on the stock exchange
Quotation on the stock exchange improves the
management of the company as managers try to
uphold the integrity of the company
It improves the credit rating of the company
making it easier for the company to obtain loans
from financial institutions
The stock exchange advertises the company to the
public
Dissolution of limited liability companies
• Dissolution of a limited company is also known as liquidation
or winding up.
•A limited liability company may be dissolved
under the following circumstances:
 a) Insolvency
•This refers to a situation where the company is
unable to pay its debts.
•A company may be dissolved if fails to pay its
debts.
•If this happens, the company may be placed in
the hands of the official receiver (placed under
receivership)
 b) Ultra vires

•Refers to where the company is engaging in

activities contrary to the provisions of its
objects clause.
•A company which is acting ultra vires will be
wound up.
 c) Amalgamation

•Refers to joining together of two or more

companies to form one company which is
completely different from the original
companies.
•When this happens, the companies joining
together must be dissolved.
 d) Court order

•A company may be ordered by a court of law to

dissolve especially when there are complaints
from creditors.
 e) Decision by share holders

•The shareholders may decide to dissolve a

company.
•This decision can only be arrived at in a general
meeting.