Private & Public Limited Liability Company – SS1 Economics Lesson Note (Second Term)

Shareholders of a limited liability company lose only the money they invested if it is liquidated. A private limited company has two to fifty shareholders, restricts the transfer of its shares and cannot invite the public to buy them. A public limited company has at least seven shareholders and sells its shares to the public.

Behavioural objectives

By the end of the lesson, students should be able to:

• define a private limited liability company and a public limited liability company;
• state the features of each type of company;
• list the advantages and disadvantages of each type of company;
• state how the two types of company differ in membership, name ending and share transfer.

What is a private limited liability company?

A private limited liability company is one which, by its articles of association, restricts the right to transfer its shares, limits the number of its shareholders to between two and fifty, and prohibits any invitation to the public to subscribe for its shares. The name of a private limited liability company must end with the abbreviation “Limited” (Ltd), for example Bluebird Nigeria Limited and Ausmer Nigeria Limited.

Features of a private limited liability company

• Owned by two to fifty people: the number of people that can form a private company must be between two and fifty.
• Restriction on shares: the transfer of shares is restricted, so the shares are not easily transferable.
• Limited liability: if the company is liquidated, the shareholders lose only the money they invested in the business. The liability does not extend to their private property.
• Perpetual existence: the withdrawal or death of a shareholder may not affect the existence of the company.
• Legal entity: the company is recognised in law as a legal person, quite distinct from its owners. It can sue or be sued in its own name, without involving the owners.
• Shares are not quoted on the stock market: they cannot be bought or sold there.
• Objective: the major aim of a private limited company is to make a profit.

Advantages of a private limited liability company

1. Large capital: a private limited liability company can easily raise capital because many shareholders form the business.
2. Shareholders have limited liability.
3. It is a legal entity.
4. It has continuity of existence.
5. It has the possibility of expansion.
6. It can make large profits.

Disadvantages of a private limited liability company

1. Limited capital: the capital available is not as large as that of a public company, because a private company cannot appeal to the public for extra capital by issuing shares.
2. Shares are not easily transferred.
3. Decision-making is delayed.
4. Lack of privacy: financial statements are usually submitted to the registrar of companies every year.
5. No invitation to the public: the company does not allow the public to subscribe to its shares.

What is a public limited liability company?

A public limited liability company is owned by private individuals and organisations. At least seven people are needed to form it, and there is no maximum number. It is called “public” because any member of the public is free to buy shares in the business when the shares are advertised for sale. The name of a public limited company must end with the abbreviation “Plc”.

Features of a public limited liability company

• The number of shareholders starts at seven and has no maximum.
• The business is a separate legal entity.
• The shareholders enjoy limited liability.
• The business has a perpetual existence.
• Capital is raised by issuing shares: the shares are advertised for sale to the general public. Capital can also be raised by issuing debentures and by borrowing from banks.
• Shares are easily transferable: any shareholder is free to sell his shares at any time, since the shares are quoted on the stock exchange.
• The company must publish its accounts, usually every year.
• Shares are quoted on the stock market.

Advantages of a public limited liability company

1. The business has large capital resources because it has a large number of shareholders.
2. Shareholders enjoy limited liability.
3. The business risks are shared among a large number of persons.
4. The business has a perpetual existence.
5. The shares of the company are easily transferable for cash.
6. The company can secure efficient managers and other skilled personnel.
7. The business is a separate legal entity.

Disadvantages of a public limited liability company

1. There is a lack of privacy in financial reporting.
2. Decision-making is delayed.
3. It is difficult to set up a public limited company (also called a joint-stock company).
4. The capital requirement is large.
5. The shareholders cannot control the business.
6. There is a lack of personal contact between the management and employees, and between the company and its customers.

How do private and public limited companies differ?

Evaluation

1. Define a private limited liability company.
2. State four features of a public limited liability company.
3. What is the minimum number of people needed to form a public limited company?
4. Give three disadvantages of a private limited liability company.
5. Explain what is meant by limited liability.

Assignment

1. List four advantages of a public limited liability company.
2. State three differences between a private and a public limited liability company.