The Management University of Africa

Student Name: Enock Alumasi Makanga

Registration Number: BML/01123/1/2021

Unit Code: BML 210

Unit Title: Company Law

Continuous Assignment Test

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 a) Distinction Between a Limited Liability Company and a General Partnership Firm

For accounting and business purposes, one can choose to create a partnership or a limited
liability company, which are the main alternatives to the corporate form of business. Compared
with the relatively rigid structure of corporations, the partnership and limited liability company
forms of legal entities allow the division of management authority, profit sharing, and ownership
rights among the owners to be very flexible. Generally, a limited liability company is a legal
entity on its own, while a partnership is owned by two or more people who share legal
responsibility of the business entity. In a partnership, the business does not possess a legal
identity outside of the business owners. A Limited Liability Company offers more flexibility in
terms of operations and personal asset protection. Below are the key differentiating features of
these two legal structures in more detail.

Ownership

A limited liability company may be owned by a single person, while a partnership needs at least
two members to be formed. Limited liability companies can also possess other business entities,
such as a partnership, corporation or other limited liability companies. Limited liability
companies may also have foreign individuals and businesses as active owners, whereas a
partnership cannot.

Formation

A partnership is created when two people decide to form a business together. The partners are
not required to file any paperwork with or obtain any documents from the local government in
order to start doing business. A limited liability company, however, must obtain a certificate of
formation with the state where the business is organized. Additionally, the entity must be
registered with each state in which it conducts business.

Liability

As its name applies, a Limited Liability Company offers limited liability protection against legal
actions and business debts. With this protection, the personal possessions of the owners cannot

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be used to pay for any of the business’s debts. Each owner is as liable for business debts as what
they invested in the company.

A partnership, on the other hand, means that the owners are each fiscally responsible for business
debts, and can be held accountable for all business discretions. This means that the owners can
be held personally accountable, and their personal assets used, to cover any debt, lawsuits and
legal fees.

Lifespan 

A Limited Liability Company has an unlimited lifespan, even if an owner dies or one sells his or
her share of the company interest. A partnership, however, ends once one partner dies or sells
their ownership interest.

b) Rights of an auditor of a Company

The Companies Act 2015 confers extensive powers on the auditor. Since, he is the agent of the
shareholders; he is having all the Rights, which other business owners shall generally have.
Specific provisions are made in the Act and so the auditor acts within the rights.

Right to Access to Books of Accounts

The auditor has a right of access to books of account, vouchers, and relevant documents of the
company at all times during his term of office.

Right to Obtain Information and Explanations

The auditor has a right to obtain whatever information or explanation he requires in performing
his duty. The person from whom the auditor requires such explanation must provide the same.
The person may be the Managing Director, Director, Manager or any other officer or employee.

Right to make Suggestions to the Board

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The auditor is also having a right to suggest suitable modifications in the method of accounting
followed by the management. But he has no right to make any alteration in the accounts of the
company on his own accord.

Right to Visit Company Branches

The auditor is entitled to visit the branches of the company. However, if a qualified auditor
audits the accounts of the branch, he can get copies of the accounts certified by the branch
auditor, and always has access over such documents. The auditor has no statutory right to visit
foreign branches.

Right to Receive Notice and Attend Meetings

The auditor has a right to receive all notices and communications relating to all general meetings
during his term. Even if the accounts audited by him are not discussed, the company should send
a notice to the auditor. The auditor is also entitled to attend the meetings. He can also speak at
the meeting if any clarification is needed from him.

Right to Sign the Audit Report

Only the auditor can sign the Auditor’s Report. The auditor also has a right to sign and
authenticate any other document, which the Act requires to furnish.

Right to be indemnified

The company under certain circumstances can take both civil and criminal proceedings against
the auditor. If legal action is taken against him, he will generally defend himself against the
proceedings. If the judgment goes to his favor or he is acquitted, the company should
compensate the loss incurred by him in defending the suit.

Right to take Legal and Technical Advice

The auditor has a right to take advice or opinion of legal and technical experts if there is a need
for it. He has the right to get adequate remuneration for the duties he has to perform and the
responsibilities he has to carry.

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 c) Definition of the Term “Limited by Shares” as a Characteristic of a Company

A company can be limited in capital based on the number of shareholders who are owed money
on their shares. This limits the company to only pay out original investments should it go under
or suffer major financial setbacks.

A company that is limited by shares refers to a company that has the liability of the members
limited by such an amount that is unpaid on their respectively held shares. The company can
enact this liability while the company is in existence or as it is ending.

Limited by shares refers to the liability of the shareholders to the creditors of the business for the
money that was invested originally. If the liability of company members is limited by the amount
not paid on shares they hold, this is referred to as a company limited by shares. The shareholder
has to meet the debits of the company only to the extent that is unpaid on his shares and no
separate property can be used to meet the debt.

A company that is limited by shares will divide the share capital into fixed amount shares that
can then be issued to shareholders and subsequently become company owners. A company
limited by shares can be financed using loans, equity, and grants.

A company limited by shares can be either a public or proprietary (private) company. A

proprietary company can have no more than fifty non-employee shareholders. It has a restricted
right to transfer shares and cannot undertake any commercial activities (except in limited
circumstances) that would require disclosure.

Proprietary companies can be large or small. The difference between small and large proprietary
companies depends on their assets and revenue as well as the number of entities that the
company controls. Small proprietary companies have less reporting requirements than larger and
public companies.

A public company is typically bigger than a proprietary company. It can issue securities in itself
to the public and have greater disclosure and reporting requirements than its proprietary
counterpart. They do not usually have a limit on the permissible number of shareholders and
have an unrestricted right to transfer shares.

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All companies limited by shares, whether proprietary or public, must include the term ‘limited’
in their name to alert potential creditors that the company has limited liability.

d) Rules that Govern the Payment of Dividends

It is important to be aware that there is a strict legal framework governing the payment of
dividends. This framework applies whatever the size of company. If the correct process is not
followed then the dividend will be unlawful and there can be potentially serious consequences.

Defining a Dividend

A dividend is a way for a company to return cash to its shareholders. Dividends are a useful (and
potentially tax efficient way) of providing additional income to an owner/manager. They can also
be used to reward investors or to move money between company groups.

There are two common types of dividends namely:

 Final dividends that are dividends that are paid once a year after the annual accounts have
been prepared. Typically they are recommended by the directors and “declared”
(approved) by the shareholders.
 Interim dividends that are dividends that can be paid at any point during the company’s
financial year and are normally declared by the directors.

To declare a lawful dividend, a company must consider the following legal requirements that
must be met before paying a dividend.

The company must have sufficient distributable profits

Dividends must be paid out of “profits available for the purpose”. These are the company’s
accumulated realized profits less its accumulated realized losses. If the available profits are not
sufficient to cover the proposed dividend, then that dividend must not be declared or paid.

Dividends must be justified by reference to accounts

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The directors need to have a set of accounts that show there are sufficient distributable profits.

The accounts must be either:

 The company’s last annual accounts

 If those annual accounts show that there are insufficient distributable profits, the dividend
must be justified by reference to more up-to-date “interim accounts”

 If the dividend is being declared in the company’s first accounting period, “initial
accounts” must be prepared.

The directors must consider the company’s current and prospective financial position

The accounts are only one part of the picture – because they will have been made up to a date
before the directors make their decision on whether to pay a dividend.

Directors must therefore carefully consider the company’s:

 Current financial position at the time of their decision (in case anything has changed
since the date of the accounts)

 Future financial position should the dividend be paid. Directors must be satisfied that,
even if there remain sufficient distributable profits to pay the dividend, the company will
still be able to meet its ongoing debts and liabilities.

The company must also have the cash to pay the dividend. The cash position is relevant to the
issues mentioned in this paragraph.

Check the company’s articles of association

A company’s articles usually contain provisions about dividends.

For example, it may be that dividends can only be paid on fully paid shares. Or the payment of
dividends may be restricted to a certain class of share. Usually, shareholders are entitled to
receive dividends in proportion to the number of shares that they hold – but the articles should be
checked. The articles may also specify a particular way in which dividends have to be
authorized.

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Comply with directors’ duties

When the directors are deciding whether to declare a dividend they must have regard to their
duties. These include duties to:

 Act within their powers promote the company’s success for the benefit of its members as
a whole

 Exercise reasonable skill and care

 Declare an interest in the proposed payment (this will be relevant, for example, if a
director is also a shareholder).

These duties involve safeguarding the company’s assets.

Document the decision to declare

Directors should ensure that they prepare board minutes recording the process of declaring a
dividend. This should include reference to the financial information relied on and the directors’
duties that have been considered.

If the correct process is not followed then the dividend will be unlawful and there can be
potentially serious consequences including:

 A shareholder who received an unlawful dividend will have to repay it (or the portion of
it which is unlawful) to the company if they know, or had reasonable grounds to believe,
that the dividend breached the legal rules. If the shareholder is also a director, they will
find it difficult to escape this liability.

 A director who authorized the payment of the dividend may be in breach of their
director’s duties and can be held personally liable to repay the company, even if they are
not a shareholder.

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