Introduction of Company Account – SS3 Book Keeping Lesson Note (Second Term)

A company is a business owned by an association of people and run as a legal person on behalf of its owners, with the aim of making a profit.

Behavioural objectives

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

1. Define a company and give Nigerian examples.
2. List the kinds of companies and explain each.
3. State the features of a limited liability company.
4. Distinguish between private and public limited liability companies.
5. Explain the key terms used in forming a company.
6. Mention the steps in the formation of a company.

Instructional techniques

• Identification
• Explanation
• Questions and answers
• Demonstration
• Videos from source

Instructional materials

• Videos
• Loudspeaker
• Textbook
• Pictures

What is a company?

A company is a business owned by an association of people and run as a legal person on behalf of its owners, with the aim of making a profit.

• Owners: the members or shareholders who put in the capital.
• Legal person: the law treats the company as separate from its owners.
• Profit motive: a trading company is set up to earn profit for its owners.

What are examples of companies in Nigeria?

1. Cadbury Plc
2. Nestle Plc
3. Dangote Sugar Refinery Plc
4. Guinness Nig. Plc
5. Okomu Oil Palm Plc
6. Julius Berger Nig. Plc
7. Access Bank Plc

What are the kinds of companies?

There are three kinds of companies that may be formed under the Companies Act of 1968: company limited by shares, unlimited company and company limited by guarantee.

1. Company limited by shares: the liability of members is limited to the amount invested in the business. If the company is wound up, shareholders lose only the value of the shares they hold.
2. Unlimited company: the liability of members has no limit. If the company is wound up, a member may have to pay the full amount of the company’s debts.
3. Company limited by guarantee: members promise to pay a fixed amount if the company is wound up. It is not formed to carry on trading activities.

What are the features of a limited liability company?

A limited liability company is a company whose members are liable for its debts only up to the amount they invested.

1. Objective: the major objective is to make a profit.
2. Ownership: the business is owned by shareholders. A private company has two to fifty shareholders. A public company has seven or more, with no upper limit.
3. Legal entity: the business is separate from its owners. It can sue or be sued in its own name.
4. Limited liability: if the company is wound up, members lose only the amount they invested.
5. Continuity (perpetual existence): the business continues into the indefinite future. The death of a shareholder does not end the company.

What are the types of limited liability company?

There are two types of limited liability company: private and public.

• Private limited liability company: a company that cannot invite the general public to buy its shares and restricts the transfer of its shares. Its name ends with Limited (Ltd).
• Public limited liability company: a company that may invite the general public to buy its shares. Its name ends with Plc.

What are the differences between a private and a public limited liability company?

What terms are used in the formation of a company?

The key terms in forming a company are promoters, memorandum of association, articles of association, certificate of incorporation, certificate of trading, prospectus and share capital.

• Promoters: the people who set up the business and carry out the formalities needed to start the company.
• Memorandum of Association: the document that states the company’s name, objects, registered office, liability of members and capital. It governs the company’s dealings with outsiders.
• Articles of Association: the document that sets the internal rules of the company, such as the powers of directors, meetings and dividends.
• Certificate of Incorporation: the document issued by the registrar of companies to prove that the company legally exists.
• Certificate of Trading: the document that allows a public company to start business after it meets the legal conditions.
• Prospectus: a notice that invites the public to buy shares or debentures in a public company.
• Share capital: the money raised by the company through the sale of shares.

What are the steps in the formation of a company?

A company is formed by getting promoters, hiring a solicitor, lodging documents and receiving a certificate of incorporation.

1. Get the promoters. Promoters are the people who set up the business and carry out the formalities required to start the company.
2. Secure the services of a solicitor. The promoters engage a solicitor to prepare the documents for the registrar of companies. These are the memorandum of association, the articles of association and a statement of nominal (registered) capital.
3. Stamp and lodge the documents. The documents are stamped and lodged with the registrar of companies.
4. Receive the certificate of incorporation. The registrar issues the certificate and the company becomes a legal person.

What extra steps does a public company take?

1. Issue a prospectus to invite the public to buy shares.
2. Receive applications and allot the shares.
3. Obtain a certificate of trading before starting business.

Evaluation

1. Define a company and name the three kinds of companies.
2. State four features of a limited liability company.
3. State three differences between private and public limited liability companies.
4. Write a short note on each of the following: prospectus, memorandum of association, articles of association, certificate of incorporation and certificate of trading.
5. List the steps in the formation of a company.

Assignment

Draw a table that shows each document used in forming a public company, who prepares or issues it, and its purpose.