Step 1 : Choose one of the articles linked below.
4. WHAT ARE THE DIFFERENT TYPES OF ARGUMENTS IN WRITING?
In the formation of a limited liability company, the following procedures must be followed:
1. The first step is to get the promoters. They are individuals who conceive the idea of a company and undertake to fulfil all legal requirements of the venture.
2. The following documents will be filled with the Registrar of Companies. These are Memorandum and Article of Association and Statement of Nominal Capital.
i. The memorandum of Association ii. The Articles of Association
iii. A declaration of compliance signed by a solicitor engaged in the formation of the company or by a person named in the Articles as a director or secretary of the
company, that all statutory requirement of the companies Act 1968 have been complied with.
iv. The situation of the company’s registered office.
A public company, in addition to the above must also filed:-
v. A list of the persons who have consented to act as director and secretary:
vi. Their written consent to act; and
vii. An undertaking in writing by each person to take up and pay for the minimum number of shares (if any) stated in the Articles as the qualification of a director.
3. The documents are stamped and submitted to the Registrar of Companies for verification.
4. When the Registrar of Companies receives and approves the necessary documents, the registrar issues a certificate of incorporation.
3.4.1 Capacity of Individual to Form Company
(1) Subject to subsection (2) of this section, an individual shall not join in the formation of a company under this
Act if‐
(a) he is less than 18 years of age; or
(b) he is of unsound mind and has been so found by a court in Nigeria or elsewhere;
or
(c) he is an undischarged bankrupt; or
(d) he is disqualified under section 254 of this Act from being a director of a company.
(2) A person shall not be disqualified under paragraph (a) of subsection (1) of this section, if two other persons not disqualified under that subsection have subscribed to the memorandum.
(3) A corporate body in liquidation shall not join in the formation of a company under this Act.
(4) Subject to the provisions of any enactment regulating the rights and capacity of aliens to undertake or participate in trade or business, an alien or a foreign company may join in forming a company.
3.4.2 The Memorandum of Association
The Memorandum of Association: is the document forming the constitution of a company and defining its objects and powers. The memorandum of association contains the external rules of the company.
The memorandum of Association of a company limited by shares contains five clauses:
1. The name of the company, followed by the word ‘limited’.
2. The domicile of the company (i.e where its registered office is situated).
3. The object of the company.
4. A declaration that the liability of the members is limited.
5. The amount of authorized capital. The amount of capital, and the shares into which it is divided. The memorandum must be signed by not less than seven persons, or not less than two in a private company, agreeing to take up not less than one share each.
3.4.3 The Articles of Association
This is a document which states the internal regulations of a limited company. It contains the regulations which govern the internal management and running of the company’s affairs.
It defines the rights of the members and the powers and duties of the directors. The clauses deal with:
1. The regulations for the issue of capital and variation of rights of members.
2. The making of calls on shares
3. The transfer and transmission of shares 4. The forfeiture and surrender of shares.
5. the holding, notice of, and procedure at general meetings.
6. The voting rights of members, pills and proxies
7. The directors-their number, remuneration qualification, 8. Rotation, disqualification and removal.
9. The appointment and power of managing directors.
10. The proceedings and powers and duties of the board of directors.
11. Notices to members.
3.4.4 Prospectus
This is a document issued by limited companies inviting the public to subscribe to its shares.
The prospectus contains detailed information about the company. It is prepared by only public companies.
3.4.5 Certificate of Incorporation
This is a document which gives legal authority to the company to operate as a legal personality. It is issued by the Registrar of Companies after due consultation with the various documents submitted.
SELF ASSESSMENT EXERCISE
Enumerate the content of both Article and Memorandum of Association 3.5 CLASSES OF SHARE CAPITAL
Definition: A share has been defined as the interest of a shareholder in the company measured by a sum of money for the purpose of liability in a limited company in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders. This refers to a unit of a company’s capital held by a shareholder entitling him to share in the profit of the company. Shares can be consolidated to blocks of 100, 1000 etc and referred to as stock. Share is evidence of ownership of a company.
It is an ownership right acquired in a company which may be transferable. Share is issued by a company at par value or no par value. Par value share is a share that has a face value, that is, its issue price is written on it. No par value share has no face value. That is the issue price is not stated on it.
The share capital of a company may be divided into different classes of shares of which the following are the most usual:
a. Preference shares: entitles the holders to a fixed rate of dividend before any dividend is paid on other classes of shares. They may also carry the right in the Articles to repayment of capital, on a winding up, in priority to other types of shares preference shares may be either cumulative of non-cumulative. Non-cumulative preference shares only carry a right to a fixed dividend out of the profits of any year, and if there are insufficient profits in that year to any the full dividend they have no right to have the arrears made up out of future profits.
Preference shares may or may not have a right, in liquidation, to repayment of capital in priority to their classes of shares.
Cumulative preference shares entitle the holders to a fixed rate of dividend in the same way as non-cumulative preference shares, but with the additional right to have any
arrears of dividend paid out of future profits before any dividends are paid on other classes of shares.
A company may have participating shares, which carry a right, in addition to a fixed divided, and to further participation in profits after a dividend of a specified rate has been paid on the ordinary shares. In the absence of express or implied provision in the Articles to the contrary, preference shares are cumulative as to dividend, but are only entitled to rank paripassu with others classes of shares in repayment of capital on liquidation.
Cumulative preference share: These shares entitled its holders to dividend whether or not the company makes profit. Dividends are carried forward from the year of loss or illiquidity to year of profit of liquidity.
Participating preference shares: These shares entitled its holders to additional dividend aside their fixed rate of dividend in the year of huge profit.
Redeemable preference shares: These shares are issued with the aim of buying them back after a specified period of time and at a preset term.
Convertible preference shares: These shares are issued with the aim of converting them to ordinary shares at a specified date and at a preset term.
b. Ordinary shares: These are shares held by the real owners of the company. They are also referred to as equity capital. They share in the profit of the company in the form of dividend after all other types of shareholders have been settled. Where the company is liquidated, they are the last to be settled.
The Distinction between Stock and Shares
A share in a company is an individual unit of capital and is indivisible. A holding must consist of a number of complete shares, and although there may be two or more joint holders of a share, no fraction of a share can be held or transferred.
Stock consists of capital consolidated into bulk, which can be made divisible in any monetary fractions. It has been aptly termed a bundle of shares’.
Other differences between stock and shares are:
(a) Stock must be fully paid up, whereas shares and need not be.
(b) Stock may be issued or transferred in fractional parts. A share cannot be divided, but can only be transferred as a complete until.
(c) Each share must be distinguished by a separate number until all the shares of the class in question are fully paid. Stock need possess no distinguishing numbers.
A company cannot issue stock in the first instance; if it wishes to issue stock it must first issue shares, and then convert them into stock when they are fully paid.
3.5.1 Par Value and No Par Value
The fixed amount that must be paid on each share of a company is called nominal value or par value. Where a share carries no fixed amount, such a share is referred to as a share of no par value.
3.5.2 Prices of Share
1. Nominal price: This is the price per share as stated in its memorandum of association. It is also referred to a par value
2. Premium Price: This referred to a situation where shares are issued at a price above their nominal price.
3. Discount Price: This referred to a situation where shares are issued at a price below their nominal price.
Market Price: This is the price at which a share can be bought from existing shareholders, it is also referred to as quoted price for shares of company quoted on a stock exchange.
SELF ASSESSMENT EXERCISE
Define share. State the difference between share and stock 4.0 CONCLUSION
It can be concluded that the adequate knowledge of the formation of company will enhance the skill of accountant in the preparation of the annual reports of private and public companies. The accounts must be prepared in accordance with relevant accounting standards.
5.0 SUMMARY
This unit explores the meaning of company, types of companies, formation of company and different types of share. Article and Memorandum of association were explained in this unit.
6.0 TUTOR MARKED ASSIGNMENT
1. Distinguish between private and public companies.
2. Outline the procedure of company formation in Nigeria.
3. Distinguished between Stock and Shares.
4. List 5 items in the Memorandum and Article of Association respectively
5. What is the meaning of Incorporation? State the importance of Certificate of Incorporation.
6. Explain the meanings of the following terms:
i. Cumulative Preference Share ii. Participating Preference Share iii. Redeemable Preference Share iv. Convertible Preference Share
7.0 REFERENCES/FURTHER READING
Akeju, J. B. (2011) “Financial Accounting for Beginners, JBA Associate Ltd, Shomolu Lagos.
Anao, A.R. (2009) “An Introduction to Financial Accounting” Longman Nigeria Plc, Ikeja, Lagos. 2nd Edition.
Igben, R.O. (2009) “Financial Accounting Made Simple, Vol. 2, ROI Publishers, Isolo, Lagos. 3rd Edition
Institute of Chartered Accountant of Nigeria, Financial Accounting, Study Pack Lagos.
The Institute of Cost Accountants of India (2013), Financial Accounting, Intermediate Study note, CMA Bhawan, 12, Sudder Street, Kolkata - 700 016
Jennings, A. R., (2001), Financial Accounting, London, Letts Educational
Wood, F. and Horner D. (2010), Business Accounting Basics, Pearson Education Limited, Edinburgh Gate Harlow, England
Salawu, R.O. (2017) “Financial Accounting for the Professionals”, OAU Press Limited, Ile-Ife.
UNIT 2: ISSUE OF SHARES AND DEBENTURES