Definition: A company; Is an association of persons registered under the companies act who
contribute capital in order to carry out business with a view of making a profit.
The act of registering a company is referred to as incorporation. Incorporation creates an
organization that is separate and distinct from the person forming it.
-A company is a legal entity that has the status of an ‘’artificial person”. It therefore has most of the rights and obligations of a human being. A company can therefore do the following;
- Own property
- Enter into contracts in its own name.
- Borrow money.
- Hire and fire employees.
- Sue and be sued on its own right.
- Form subordinate agencies, ie, agencies under its authority.
- Disseminate or spread information.
-The owners (members) of a company are referred to as shareholders
FEATURES OF COMPANIES (LIMITED LIABILITY COMPANIES)
-A company in an artificial person and has the same rights as a natural person. It can therefore
sue and be sued in a court of law, own property and enter into contracts in its own name.
-The members have limited liabilities.
-Companies have perpetual life which is independent of the lives of its owners. Death, insanity
or bankruptcy of a member does not affect the existence of the company. (this is referred to as
perpetual existence or perpetual succession)
- A company is created for a particular purpose or purposes.
Formation
-People who wish to form company are referred to as promoters
-The promoters submit the following documents to the registrar of companies:
i) Memorandum of Association
-This is a document that defines the relationship between the company and the outsiders. It
contains the following:
a) Name of the company/Name clause; -The name of the company must be started and
should end with the word “Limited” (Ltd).This indicates that the liability of the company is
limited.
-Some companies end their names with “PLC” which stands for “Public limited company”
which makes the public aware that although it is a limited liability company it is a public not
private.
b) The objects of the company/objective clause;-This set out the activities that the company
should engage in
-The activities listed in this clause serve as a warning to outsiders that the company is
authorized in these activities only.
c) Situation clause;-Every company must have a registered office where official notices and
other communication can be received and sent
d) Capital clause;-It also states that the amount of capital which the business can raise and the divisions of this capital into units of equal value called shares i.e. authorized share capital also called registered or nominal share capital.
-It also specifies the types of shares and the value of each share
e) Declaration clause:-This is a declaration signed by the promoters stating that they wish
to form the company and undertake to buy shares in the proposed firm
-The declaration is signed by a minimum of seven promoters for public limited company and a
minimum of two for private company.
-The memorandum of association also contains the names of the promoters
-The promoters signs against the memorandum showing details of their names, addresses,
occupation and shares they intend to buy. Each signatory should agree to take at least one
share.
i) Articles of Association
-This is a document that governs the internal operations of the company
-It also contains rules and regulations affecting the shareholders in relation to the company and in relation to the shareholders themselves.
-It contains the following;
- Rights of each type of shareholder e.g. voting rights
- Methods of calling meeting and procedures
- Rules governing election of officials such as chairman of the company, directors and
auditors
- Rules regarding preparation and auditing of accounts
- Powers, duties and rights of directors
- Methods dealing with any alterations on the capital.
ii) A list of directors with details of their names, addresses, occupations, shares subscribed
and statements of agreement to serve as directors
iii) Declaration that registration requirements as laid down by law (by the companies act)
have been met. The declaration must be signed by the secretary or a director or a
lawyer.
iv) A statement signed by the directors stating that they have agreed to act as directors.
v) A statement of share capital- this statement gives the amount of capital that the
company wishes to raise and its subdivision into shares.
-Once the above documents are ready, they are submitted by the promoters to the registrar of
companies. On approval by the Registrar and on payment of a registration fee, a certificate of
incorporation (certificate of registration) is issued
-The certificate of incorporation gives the company a separate legal entity.
Sources of capital
1. Shares; The main source of capital for any company is the sale of shares.
-A share is a unit of capital in a company e.g. if a company states that its capital is
ksh.100,000 divided into equal shares of ksh.10 each.
-Each shareholder is entitled to the company’s profit proportionate to the number of shares
he/she holds in the company.
Types of shares:
a) Ordinary shares
b) Preference shares
a) Ordinary shares;-Ordinary shares have the following rights:
- Have voting rights
- Have no fixed rate of dividends. The dividends on them vary according to the amounts of
profit made
- They have a claim to dividends after the preference shares
- If the company is being liquidated, they are paid last after the preference shares
b) Preference shares;-They have the following characteristics;
- Have a fixed rate of sharing profits(dividends)
- Have a prior claim to dividends over the ordinary shares
- Have no voting rights
- Can be redeemable or irredeemable. Redeemable shares are the ones that can be bought
back by the company at a future date while irredeemable ones are ones that cannot be
bought back
- Can be cumulative or non-cumulative. Cumulative shares are the ones that are entitled to
dividends whether the company makes profit or not. This means if the company makes a
loss or a profit which is not enough for dividends in a certain year, the dividends to
cumulative shares are carried forward to the next year(s) when enough profit are made
-Non- cumulative shares are the ones whose dividends are not carried forward to the following
year(s)
2. Debentures
This refers to loans from the public to a company or an acknowledgement of a debt by a
company
-They carry fixed rate of interest which is payable whether profit are made or not.
They are issued to the public in the same way as shares.
They can be redeemable or irredeemable.
Redeemable debentures are usually secured against the company’s assets in which case they
termed as secured debentures or mortgaged debentures.
NB: Where no security is given, the debentures are called unsecured /naked debentures.
3. Loans from bank and other financial institutions;-A company can borrow long term or
short term loans from banks and other money lending institutions such as Industrial and
Commercial Development Corporation [I.C.D.C]
These loans are repayable with interest of the agreed rates.
4. Profits ploughed back;-A company may decide to set aside part of the profit made to be
used for specified or general purposes instead of sharing out all the profit as dividends. This
money is referred to as a reserve.
5. Bank overdraft;-A customer to a bank may make arrangements with the bank to be allowed
to withdraw more money than he/she has in the account.
6. Leasing and renting of property.
7. Goods brought on credit.
8. Acquiring property through hire purchase
TYPES OF COMPANIES
I. PRIVATE LIMITED COMPANY
Private limited company has the following characteristics;
- Can be formed by a minimum of 2 and a maximum of 50 shareholders, excluding the
employees,
- Does not advertise its shares to the public, but sells them privately to specific people
- Restricts transfer of shares i.e. a shareholder cannot sell his/her shares freely without the
consent of other shareholders.
- Can be managed by one or two directors. A big private company may however, require a
board of directors
- Can start business immediately after receiving the certificate of incorporation without
necessarily having to wait for a certificate of trading.
- It does not have an authorized minimum share capital figure.
- Has a separate legal entity and can own property, enter into contracts, sue or be sued.
- Has limited liability.
- Has a perpetual existence.
Formation
-It must have a memorandum of association, article of association list of directors, declaration signed by a director or lawyer and certificate of incorporation.
Advantages of private limited company
i) Formation: The Company can be formed more easily than a public company. The cost of
information is less than that of a public company
ii) Legal personality: A private company is a separate legal entity from its owners. Like a
person, it can own property, sue or be Sued and enter into contacts
iii) Limited liability: Shareholders have limited liability meaning that they are not
responsible for the company’s debts beyond the amount due on the shares
iv) Capital: They have access to a large pool of capital than sole proprietorship or a
partnership. They can borrow money more easily from financial institutions because it
owns assets which can be pledge as security
v) Management: A private company has a larger pool of professional managers than a sole
proprietorship or a partnership. These managers bring in professional skills in their own
areas which are of great advantage to a private company
vi) Assured continuity of the business: Death, bankruptcy or withdrawal of a shareholder
does not affect the continuity of the company
vii) Trading: Unlike a public company a private company can commence trading
immediately upon receiving a registration certificate.
Disadvantages of a private company
i) Returns: A private company, unlike sole proprietorship or a partnership, must submit
annual returns on prescribed forms to the registrar of companies immediately after the
annual general meeting
ii) Capital: A private company cannot invite the public to subscribe to its shares like a
public limited company. It therefore limited access to a wide source of capital.
iii) Share transfer: The law restricts the transfer of shares to its members/shareholders are
not free to transfer their shares
II) PUBLIC LIMITED COMPANY; - Public limited companies have the following
characteristics:
a) Can be formed by a minimum of 7 (seven) shareholders and no set maximum.
b) Cannot start business before it is issued with a certificate of trading. This is issued after the certificate of incorporation and after the company has raised a minimum amount of capital
c) It’s managed by a board of directors
d) The shares and debentures are freely transferable from one person to another.
e) It advertises its shares to the public/ invites the public to subscribe for/buy its shares and debentures.
f) Must publish their end of year accounts and balance sheets
g) Must have an authorized minimum share capital figure
h) Has a separate legal entity and can own property, enter into contracts, sue or be sued.
i) Has limited liability.
j) Has a perpetual existence.
Advantages of public limited company
i) Wide range of sources of capital :It has access to wide range of sources of capital especially
through the sale of shares and debentures
-They can also borrow money from financial institutions in large sums and have good security to
offer to the lenders.
ii) Limited liability: Like private companies, public limited company’s shareholders have
limited liability i.e. the shareholders are not liable for the company’s debts beyond the
shareholders capital contribution.
iii) Specialized management: PLC’S are able to hire qualified and experie-nced professional
staff.
iv) Wide choice of business opportunities: Due to large amount of capital a public company
may be suitable for any type of investment
v) Share transferability: Shares are freely transferable from one person to another and affects
neither the company’s capital nor its continuity.
vi) Continuity: PLC has a continuous life as it is not affected by the shareholders death,
insanity, bankruptcy or transfer of shares
vii) Economies of scale: Their large size enables them to enjoy economies of scale operations.
This leads to reduced costs of production which raises the levels of profit
viii) Employee’s motivation: They have schemes which enable employees to be part owners
of the company which encourages them to work harder in anticipation of higher dividends
and growth in the value of the company’s shares.
ix) Share of loss: Large membership and the fact that capital is divided into different classes’ means that the risk of loss is shared and spread.
x) Shareholders are safe guarded; Publicity of company accounts safeguard against frauds.
Disadvantages of public limited companies
i) High costs of formation: The process of registering a public company is expensive and
lengthy. Some of the costs of information are legal costs, registration fees and taxes
ii) Legal restrictions: A public company must comply with many legal requirements making
its operations inflexible and rigid
iii) Alienation of owners: Shareholders non-participation in management is a disadvantage
to them
iv) Lack of secrecy: The public limited companies are required by law to submit annual
returns and accounts to the registrar of companies denying the company the benefit of
keeping its affairs secret. They are also required to publish their end of year accounts
and balance sheets.
v) Conflicts of interests: Directors may have personal interests that may conflict with
those of the company. This may lead to mismanagement.
vi) Decision making; Important decision are made by the directors and shareholders. The
directors and shareholders meet after long periods which make decision making
slow/delayed and expensive.
vii) Diseconomies of scale: The large size and nature of business operations of public
limited companies may result in high running/operation costs and inefficiency
viii) Double taxation: There is double taxation since the company is fixed and dividends
distributed to the shareholders are also taxed
ix) Inflexibility: Public limited companies cannot easily change its nature of business in
response to the changing circumstances in the market. All shareholders must be
consulted and agree.
DISSOLUTION OF A COMPANY
The following are the circumstances that may lead to the dissolution of a company:
- Failure to commence business within one year- If a company does not commence business
within one year from the date of registration, it may be wound up by a court order on
application of a member of the company.
- Insolvency – when a company is not able to pay its debts, it can be declared insolvent and
wound up.
- Ultra- vires – this means a company is acting contrary to what is in its objective clause. In
such a case, it may be wound up by a court order.
- Amalgamation – two or more companies may join up to form one large company
completely different from the original ones.
- Court order – the court of law can order a company to wind up especially following
complaints from creditors.
- Decision by shareholders – the shareholders may decide to dissolve a company in a general
meeting.
- Accomplishment of purpose or expiry of period of operation – a company may be dissolved
on accomplishment of its objects, or on expiry of period fixed for its existence.
THE ROLE OF STOCK EXCHANGE AS A MARKET FOR SECURITIES
DEFINATIONS
(1) Stock: a group of shares in a public limited company
-Stocks are formed when all the authorized shares in a particular category have been issued and
fully paid for.
(2) Stock exchange market: is a market where stocks from Quoted companies are bought and
sold
-Stock exchange markets enable share holders in public companies to sell their shares to other
people, usually members of the public interested in buying them.
(3) A Quoted Company: is a company that has been registered (listed) as a member of the stock
exchange market.
-Companies that are not quoted cannot have their shares traded in the stock exchange market.
(4) Securities: this could either refer shares or documents used in support of share ownership.
(5) Initial Public Offer (I. P. O): refers to situations in which a company has floated new shares
for public subscription ( Has advertised new shares and has invited members of the public
to buy them.
(6) Secondary market: The market that deals in second hand shares i.e. the transfer of shares
from one person or organization to another.
There is only one stock exchange market in Kenya i.e. The Nairobi Stock Exchange.
A person wishing to acquire shares will do so either at an IPO or in the secondary market.
However, an investor cannot buy or sell stocks directly in the stock exchange market. They can
only do so through stock brokers.
ROLES OF THE STOCK EXCHANGE MARKET
(a) Facilitates buying of shares- it provides a conducive environment to investors who want to
buy shares in different companies.
(b) Facilitates selling of shares- it creates a market for those who wish to sell their shares.
(c) Safeguarding investors’ interests- it monitors the performance of the already quoted
companies and those found not meeting expectations are struck off. Companies who want
to be quoted must also attain a certain standard of performance.
(d) Provides useful information- it provides timely, accurate and reliable information to
investors which enable them to make decisions on the investments to make. The
information is passed on through mass media and stock brokers.
(e) Assist companies to raise capital- it assists companies to raise capital by creating an
environment through which companies issue new shares to members of the public in an
IPO.
(f) Creation of employment- it creates employment for those who facilitate the buying and
selling of shares eg stock brokers, stock agents etc.
(g) Raising revenue for the government- the government earns revenue by collecting fees and
other levies/ dues from activities carried out in the stock exchange market.
(h) Availing a variety of securities- it avails a variety of securities from which an investor can choose from. The market therefore satisfies needs of various investors eg investors who
wish to buy from different companies can do so in the market.
(i) Fixing of prices- the stock exchange market is in a position to determine the true market
value of the securities through the forces of demand and supply. This is of great importance
to both the buyer and the seller.
(j) Measures a country’s economic progress- the performance of securities in the stock
exchange market may be an indicator of a country’s economic progress e.g a constant rise
in prices and volumes of securities traded within a given period of time would indicate that
the country’s economy is positively growing.
(k) Promotes the culture of saving- it provides investors with opportunities to channel their
excess funds. Such people act as role models to other members of the society who may
emulate them thereby promoting a saving culture.
Titany answered the question on November 10, 2021 at 08:29