Forms of Business Units 5
a) Ordinary sharesOrdinary 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 sharesb) 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 thebank 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 purchaseTypes of Companies
I. Private Limited CompanyPrivate 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 companyi) Formation:
The Company can be formed more easily than a public company.
The cost of information is less than that of a public companyii) 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 contactsiii) Limited liability:
Shareholders have limited liability meaning that they are
not responsible for the company’s debts beyond the amount due on the sharesiv) 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 securityv) 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 companyvi) Assured continuity of the business:
Death, bankruptcy or withdrawal of a shareholder does not affect the continuity of the companyvii) Trading:
Unlike a public company a private company can commence trading immediately upon receiving a registration certificate.Disadvantages of a private companyi) 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 meetingii) 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 experienced professional staff.
iv)Wide choice of business opportunities: Due to large amount of capital a public company may be suitable for any type of investmentv) 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 sharesvii) 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 profitviii) 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. Forms of Business Units page 1
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