Company Formation

Back to: FINANCIAL ACCOUNTING SS2

 

Welcome to class! 

In today’s class, we will be talking about company formation. Enjoy the class!

Company Formation

Introduction to Company Formation

Company Formation is all about the process of founding (i.e., incorporating) a new business enterprise. It is also sometimes called company registration. Company Formation can also be defined as the procedures undertaken to register a business enterprise as a limited company and give it legal status. In other words, a business becomes a distinct legal entity as soon as it is incorporating. Please note [therefore] that when a business enterprise is incorporated, it becomes an individual ‘person’ in the eyes of the law. Incorporated businesses are completely separate from their owners in terms of finances, liabilities, contractual agreements, and ownership of property and assets. The constitution of the Federal Republic of Nigeria does not view unincorporated businesses (such as sole traders) as distinct legal entities. Therefore, there is no separation between a sole trader business and its owner in terms of finances, assets and liabilities.

Procedure for the formation of a Company

During 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.
3. The document is stamped and lodged with 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.

Memorandum of Association

The memorandum of association contains the external rules of the company, it refers to the object and power of the company and how it intends to deal and interact with the outside world; it contains the following-

1. The name of the company and the word limited liability at the end.
2. The registered office.
3. The object of the company.
4. The declaration that the liability is limited.
5. The amount of the authorized capital

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 of the company affairs. The following are found in the article-

1. The right and responsibilities of the shareholder.
2. The duties and power of the directors.
3. How directors may be appointed.
4. The right and duties of the members as between each other and the company.
5. The procedure for accounting and auditing of the company’s book etc.

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.

Certification 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.

Private and Public Companies 

Privately-held companies are only owned by either solely by their founders, management or a group of private investors. On the other hand, Public companies are companies that have sold portions of their stocks to the public via a process called an initial public offering. This, therefore, means that such companies are not owned by a close-knit group anymore as shareholders have a claim to part of the company’s assets and profits.

Quoted and Unquoted Companies 

Quoted companies are companies whose shares can be bought and sold on the Stock Exchange. On other hand, unquoted companies are companies whose securities were previously issued on the stock exchange; but not anymore.  In other words, a company is classified as a  quoted company if it is traded on the stock exchange. Such a company also has to abide by various rules and regulations such as being audited regularly, publishing its accounts and most especially must make it easy for shareholders to sell easily etc. In the same vein, the unquoted securities have none of the above safety nets, and when you decide to sell, you may not find a buyer easily. The value of security is hard to determine, as there is no market price. You have to agree on a value at arm’s length with the buyer. And if you need to sell urgently, you may need to accept steep losses.

Evaluation

1. What is company formation?
2. What are the procedures for company formation?
3. What is the Memorandum of association and what does it contain?
4. What is a Certificate of incorporation?
5. What are the things contained in an article of association?

 

In our next class, we will be talking about the Nigerian Financial System.  We hope you enjoyed the class.

Should you have any further question, feel free to ask in the comment section below and trust us to respond as soon as possible.

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