TOPIC: FIRMS AND INDUSTRY

OBJECTIVES

At the end of this lesson students will be able to:

• Define private and public companies.

• Distinguish between private and public limited companies.
• State the characteristics distinctions between private and public companies.
• Distinguish between quoted and unquoted companies.
• List method of raising funds in the capital market.
• State the nature of the second-tier stock market.

TYPES OF LIMITED LIABILITY COMPANIES

1. Private limited liability company
2. Public limited liability company

A. Private limited liability company: This is a company which by its articles

limits the number of its members between two to fifty, restricts the right
to transfer and sell its shares, and must end with “Limited”

FEATURES OF PRIVATE LIABILITY COMPANIES

1. Ownership is by shareholders who may be between two and fifty.
2. The major aim is to make profit.
3. Capital can be derived from issue of shares privately amongst members.
4. The shareholders have limited liability.
5. The death of a shareholder does not affect the business.
6. It is managed by the board of directors.
7. Shares are not easily transferable except with the consent of the
shareholder.

ADVANTAGES OF PRIVATE LIABILITY COMPANIES

1. It can easily raise large capital as a result of many shareholders.
2. There is possibility of expansion because of availability of large capital.
3. Individual risk is reduced as it is shared among the shareholders.
4. They enjoy large profit because of its large size.
5. It has a legal entity, i.e. it can sue and be sued in its name.
 6. The withdrawal or death of a shareholder does not bring an end to the
business.

DISADVANTAGES OF PRIVATE LIABILITY COMPANIES

1. It does not allow the public to subscribe to its shares.
2. Lack of privacy as financial statements is usually submitted.
3. High tax payment of 30%.
4. Personal contact does not exist as there is no close relationship between
employees and customer.
5. Delay in decision making because many people will have to be consulted.

B. Public limited liability company (joint stock company): This is a company

which allows the public to subscribe to its shares and whose shares are
transferable and must end with “Plc” e.g. Total plc, UBA Plc.

FEATURES OF PUBLIC LIMITED LIABILITY COMPANY

1. There is no restriction to the transfer of shares.
2. Ownership is from seven to infinity.
3. Accounts must be published for public consumption.
4. It has perpetual existence.
5. There is separation of ownership from management.
6. It is a legal entity.

ADVANTAGES OF PUBLIC LIMITED LIABILITY COMPANY

1. Shares of a public limited liability company can easily be transferred
without having any effect on the business operation.
2. Banks prefers to grant loan to public company because of no default in
payment.
3. It is democratic in nature as shareholders are entitled to vote during
meetings.
4. Employees can be joint owners by purchase of shares.
5. It enjoys perpetual existence regardless of death of a shareholder.

DISADVANTAGES OF PUBLIC COMPANY

1. Lack of privacy in financial reporting.
2. There is slow decision making because of wider consultation.
 3. Decrease in personal interest unlike the sole- trader.
4. The capital required to set up a joint stock is large.
5. There is a separation of owners from management.
6. High tax rate.

SIMILARITIES BETWEEN PRIVATE AND PUBLIC LIMITED COMPANY

1. Both have legal status.
2. They have limited liability.
3. There is continuity of existence.
4. There is large capital outlay.
5. Directors control the companies.
6. Powers are executed through memorandum of Association.

Differences between private and public limited company

Public Liability Company Private Liability Company

1. Shares are easily 1. Shares are not easily

transferable. transferred.

2. Shares are quoted in the 2. Its shares are not quoted.

stock exchange.

3. It has minimum of seven 3. It has minimum of two

persons. people.

4. It is owned by members of 4. It is owned by family

the public. members and friends.

5. There is no privacy as the 5. It enjoys some level of

accounts must be published. privacy.

QUOTED AND UNQUOTED COMPANIES.

Quoted company is a company that has its shares listed in the stock market.
This automatically qualifies such company as a public company.

Unquoted company is a company that does not trade its shares on the stock
market and so the shares are not listed.

METHOD OF RAISING FUNDS IN THE CAPITAL MARKET.

1. Public Issue: In a capital market, company can borrow funds from primary
market by way of public issue of shares and debentures.
2. Rights Issue: In capital market, rights issue means selling securities in
primary market by issuing shares to existing shareholders.
3. Private Placement: The capital issue is sold directly to a small group of
investors. Mainly institutional investors like insurance companies, banks, mutual
funds, few private investors, etc.
4. Offers for Sale: In a capital market, the company sells the entire issue of
shares or debentures to an issue house or merchant banker at an agreed price,
which is normally below the par value.
5. Obtaining Term Loans: In capital market, companies can additionally raise
long term cashes by obtaining long-term loans, mostly from financial institutions.

SECONDARY MARKET:

The secondary market is also called the stock market; where investors come
together to trade among themselves. Note that the investors trade on previously
issued securities without the issuing companies’ involvement. For example, if you
buy Dangote stock, you are dealing only with another investor who owns shares in
Dangote. In other words, Dangote is not directly involved with the transaction.