Section 22 of the Companies and Allied Matters Act (“the CAMA”) provides that a private limited liability company is a company which states in its memorandum of association to be a private liability company. The company shall restrict the transfer of its shares and the total number of its members shall not be more than 50 (fifty) persons.
Employees of a company shall not be included in computing the number of members of a private company. If 2 (two) or more persons hold one or more shares in a company jointly, they are treated as a single member. Unless authorized by law, a private company shall not invite the public to subscribe for its shares or debentures or deposit money for fixed periods payable at call whether or not it bears interests.
Advantages of private company limited by shares
- Limited Liability
The main advantage of a private company limited by shares is the limited liability of its shareholders. During the recent recession, many businesses experienced financial constraints which affected their performance and solvency. One advantage of private limited companies during the period is that the financial liability of the shareholders of such companies was limited to the number of shares they hold in the company. Therefore, if a private limited company is in financial trouble and had to wind up, shareholders would not risk losing their personal assets.
However, perpetrating a fraud related to the private limited company would negate an owner’s limited liability protection. In such a case, the corporate veil of the company will be pierced to hold the perpetrators of the fraud personally liable. In the same vein, Section 290 of the CAMA provides that a director and other officers involved shall be personally liable where a company receives money by way of loan for specific purpose; or receives money or other property by way of advance payment for the execution of a contract or project; and with intent to defraud, fails to apply the money or other property for the purpose for which it was received.
- Restricted Trade of Shares
This is an advantage to some shareholders because shareholders who want to sell their shares cannot sell them to outside buyers. Shareholders must also agree to the sale or transfer of shares. The risk of hostile takeovers is low.
- Separate Personality
As propounded in the landmark case of Salomon v Salomon, once a private company is incorporated, it becomes an independent legal entity which is able to sue and be sued and own assets separate from that of the company’s owners.
- Continued Existence
Another advantage of a private limited company is its continued existence, even after the owners die or leave the company. A private limited company differs from a sole proprietorship in that the latter is owned by a single individual who is personally responsible for the business debts and essential to its continued existence.
Disadvantages of private company limited by shares
- Registration Process
Registration of private company limited by shares takes a longer period and involves a process and cost which are not applicable to sole proprietorship and business names. However, once registered, the private limited company enjoys a wide variety of powers and rights.
- Compliance Formalities
A private limited company requires a range of compliance post incorporation. It is required to hold board meetings, general meetings, get the accounts audited, maintain a statutory register and file an annual return with the Companies Registry each year. In addition to the corporate compliance formalities, a company would also have to maintain compliance with tax and labour laws, which are applicable.
- Division of Ownership
A major disadvantage of the private limited company is that it requires a minimum of 2 (two) persons to act as directors and shareholders. There is no one-man company in Nigeria yet. The Bill to amend the CAMA to provide for a one-man company is yet to be passed by the National Assembly.
As it stands now, a sole entrepreneur who wishes to start and operate a business by him/herself cannot start a private limited company. Major decisions in the company require the consent of at least 2 (two) directors. The company would also need to have 2 (two) shareholders to legally carry on business, even if one person holds a negligible amount of shares. This may stifle the progress of the company, especially where the directors or shareholders are at loggerheads.
- Restricted Trade of Shares
This may be a disadvantage because the restriction placed on the sale of shares limits the options in which shareholders have to liquidate their shares to raise capital for other endeavours that they may be interested in.
- Restriction on Public Participation
A private company is prevented from raising capital for its business by inviting the public to subscribe for its shares. This may be a limitation to the prospects and growth of the company.
Written by: Fred-young & Evans LP
This article appeared first in Mondaq…