You’ve probably gone through our post on all forms of business organizations in Nigeria, and want to learn more about Joint stock company, isn’t it?
Sole proprietorship and partnership business seem easier to comprehend as they’re simple to set up and have straight forward features.
But when it comes to joint stock companies, things may seem a little bit difficult, from the composition to documents involved, advantages, disadvantages, etc.
Starting from the very start will be great, don’t you agree?
A Joint stock company is also referred to as a public limited liability company. So, when public limited liability company is mentioned, it means joint stock company.
If there’s a public limited liability company, then there must be a private limited liability company. Now you see we have to take it from the very beginning.
In this article, you’ll learn what the following terms mean:
- Limited liability companies
- Types of limited liability companies (Private & Public)
- Formation of limited liability companies
- Document of a limited liability company (Articles and Memorandums)
- Then, the Public limited liability company (Joint stock company) will be explained in detail.
What Is a Limited Liability Company LLC
First, a company simply a legal entity that is created by the association of a number of people, who in accordance with the law pool their resources (capital) together in order to setup a business venture.
Now, a limited liability company LLC is one in which the liability or burden of debts of the company is limited to the amount of share capital contributed by each shareholder, in the event of liquidation.
In simpler terms, it means a shareholder of the company cannot suffer the liability of the company up to his own private property.
Unlike sole proprietorship business and partnership business structures who suffers unlimited liability, members of a limited liability company enjoy limited liability.
Types of Limited Liability Companies
Now that you understand what an LLC is all about, let’s talk about 2 types and they are:
- Private Limited Liability Company and;
- Public Limited Liability Company (or joint stock company)
Private Limited Liability Companyis a company which by its articles:
- restricts the right to transfer its shares,
- limits the number of its shareholders from 2 to 50,
- prohibits any invitation to the public to subscribe to its shares and;
- the name of the private company must end with “Limited”, e.g Prime Services Nigeria Limited
A Public limited liability company on the other hand is one which by its articles allows the public to subscribe to its shares. It is also referred to as a Joint Stock Company.
More features of the Joint stock company soon. But first, how are limited liability companies formed?
Formation of a Limited Liability Company
The steps involved in the formation of a limited liability company (be it private or public) are as follows:
STEP 1: The promoter(s) devise a scheme of capitalization, bearing in mind the cost of formation, assets to be bought and working capital.
STEP 2: The promoter(s) are required to secure the services of a solicitor to prepare certain documents to be filed with the registrar of companies.
The documents are:
- Memorandum of Association
- Article of Association
- Statement of Nominal Capital
STEP 3: The documents are stamped and lodged with the registrar of companies.
Articles of Association AOA
This is a document in which the regulations which govern the internal management of the company’s affairs, the duties, rights and powers of the shareholders are stated.
In other words, it takes care of the internal relationships between the company and the members.
- The method of issuing capital
- Definition of powers and duties of directors
- How directors are to be elected
- The right of shareholders
- Method of sharing dividend
- Transfer and forfeiture
- Method of holding meetings
- Method of auditing accounts of the company
- How auditors are to be remunerated.
Memorandum of Association MOA
This is a document forming the constitution of a company and defining its objectives and powers with regard to its dealing with outsiders.
Once registered, it becomes a public document that regulates external relationship of the company.
Memorandum of Association contains the following information:
- Name of the company which must end with the word “Limited” or “PLC”
- The registered office of the company
- The objectives of the company
- The amount of authorized capital and the various shares into which it is divided.
- A declaration that the liability of the members are limited.
- The names of founders of the company
- Status of the company, that is, private or public
- The restriction, if any, on the power of the company
- The period for which the company will operate
Joint Stock Company In Detail
The Joint Stock Company is another name for public limited liability company, one of the forms of business organization in Nigeria.
It is called the Limited Liability Company In Nigeria and Britain or the Corporation in the United States of America.
It is always the most important form of business organization in an economy. Also, it is the greatest innovation in business organisation as rapid expansion of total output with minimum risk is possible.
Joint stock company or public limited liability company, unlike sole proprietorship business is a legal entity. It is recognized as legal and seen as separate from it’s owners.
The word public implies that any member of the public is free to purchase shares in the business when shares are advertised for sale.
Public limited are owned by private individuals and organizations and this type of company makes room for wide participation.
Advantages of a Joint Stock Company
The following characteristics are what makes a joint stock company enticing:
- Large Capital Base: Joint stock company can raise huge capital by selling more shares to the public
- Ownership: The number of shareholders range from 7 to infinity i.e owners must be at least 7 but there’s no maximum number.
- Legal status: Joint stock company is a legal entity and has a distinct personality from that of the owners. It can sue and be sued.
- Perpetual Existence: The death or withdrawal of one or more shareholders will not affect the existence of the company.
- Limited Liability: The liability of shareholders is limited to the amount of share capital contributed to the company. Private assets of shareholders will not be taken or used to cover debts in the event of liquidation.
- Transferability of Shares: In a joint stock company or public limited liablity company, shares can be easily transferred without having an effect on the business operation.
- Loan facilities: Many financial institution prefer to grant loans to joint stock companies than other forms of businesses like sole proprietorship.
- Great possibility of Expansion: With the availability of huge capital, mass production of goods will automatically dictate expansion of the company.
- Employees become co-owners: Employees could become co-owners of the business by purchasing shares in the company.
Disadvantage of Joint Stock Companies
- No Privacy: A joint stock company is required to prepare financial records and it must be audited and published annually.
- Conflict of Interest: There is the possibility of conflict of interest among shareholders, directors and staffs, which may affect the efficiency of the business.
- Slow decision making as a result of wider consultations and discussions in the management hierarchy.
- Joint stock companies are difficult to set up or establish as things are more complicated than partnership businesses and sole proprietorship.
- A joint stock company is required by law to pay corporate tax from the company profit.
Quick Read: Law companies in Lagos state for legal services
Joint Stock Company (Summary)
Joint stock companies make profit from the sales of shares as advertised to the public, Also, shareholders are seen as separate from the business.
One of the major advantages of a joint stock company is that it enjoys economies of large scale production and shareholders can transfer shares easily.
So what you think? Let’s have your comment in the box provided below.