You have decided to start a business with a colleague who has substantial expertise in company affairs. While you believe a partnership form of business is the most suitable, he prefers either a sole proprietorship or a limited liability company.
Required:
a) Explain FIVE benefits which are likely to accrue to a limited liability company. (10 marks)
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- Limited liability: Owners or members of a Limited Liability Company have limited liability. This means that unlike partnerships and sole proprietorships the liabilities of members is limited to the shares they hold or any unpaid amount on the shares issued to them. They do not assume the risks for any debts or financial obligations and some acts incurred by their companies.
- Flexibility in allocation: The amount of money members invest in an LLC does not need to be equal to their percentage of ownership. Percentages of profits and losses can be assigned to owners using an operating agreement. This also means that an investor can finance half of an LLC without necessarily owning half of the business.
- A Limited Liability Company has a separate identity and is recognized as a separate company under law. The company can also own property due to this feature.
- Greater pool of knowledge, ideas, skills, abilities and expertise. The large scale of the operations of new company will enable it to attract highly talented specialists who have the knowledge to steer the affairs of the company.
- A Limited Liability Company has stability in that its existence is not affected by the death of a member/s as in the case of a sole proprietorship or partnership.
- It gives the company more authority of risks taking.
- A lot of shareholders are allowed in the company. Hence, this makes it easier to raise capital in comparison to other forms of companies increasing the scope of expansion in future. Growth and Expansion – due to the larger capital base, growth and expansion can be carried out easily.
- No double taxation. Sole proprietors may pay income tax and at the same time the firm also pays tax resulting to double taxation under the new arrangement, tax will be based on the profit made by the company (Any 5)
b) Identify the TWO types of limited companies and explain the differences. (10 marks)
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- Private Limited Company
- Public Limited Company
The Private Limited Liability Company
A private limited liability company is a limited liability company formed by a minimum of two people and a maximum of fifty people, with the exception of banks where the maximum is ten. These shareholders make financial contributions where capital is needed as the shares of a private limited liability company cannot be floated on the stock exchange nor sold to members of the public in a trading year.
Features of the Private Limited Liability Company
- Ownership – shareholders range from two to fifty people (except in the case of banks where the range is from two to ten people).
- Legal status – as a separate legal entity, the company can sue and be sued.
- Shareholders are limited by the shares held.
- Transfer of share(s) is made possible only with the consent of other shareholders.
- Source of capital – additional capital can only be raised through private contributions made by shareholders which are converted into shares or by the contribution(s) made by a new shareholder(s). Other sources of capital to the company include loans from private individuals, loans and overdrafts from financial institutions such as banks, the company’s retained earnings and credit facilities from suppliers.
- Privacy – the company’s books of accounts are not made public for inspection nor published in the dailies. As required by the law, audited reports are sent to the registrar of companies to attest to the non-sale of shares to members of the public in a trading year.
- ‘Ltd.’ – the name of a private limited liability company ends with the acronym ‘Ltd.’ which implies ‘limited’. This indicates limited liabilities by shares. (Any 3)
The Public Limited Liability Company
A public limited liability company is a company that can be formed by a large number of people, but a minimum of seven shareholders. This is because a public limited liability company offers its shares to members of the public through the stock exchange. The motive for the establishment of the company is to make profit.
In the Public limited liability company, the shareholders elect members of the board of directors who direct the affairs of the organization, alongside the managing director or any other person as the chairman.
Features of the Public Limited Liability Company - Ownership – shareholders range from seven and above.
- Legal status – as a separate legal entity, the company can sue and be sued.
- Shareholders are limited by the shares held.
- Transfer of share(s) is made possible without the consent of other shareholders or the members of the board of directors.
- Source of capital – additional capital can be raised through the value of shares sold to members of the public through the stock exchange, loans and overdrafts from financial institutions such as banks, the company’s retained earnings and credit facilities from suppliers.
- Publicity/Inspection – the company’s books of accounts are made public for inspection in the dailies. As required by the law, audited reports are sent to the registrar of companies in a trading year.
- Incorporation – the company is incorporated under the Companies Act. (Any 3)