What is a company?
It is a voluntary association of persons formed to carry out some business for profit , with capital divisible into transferable shares, having a corporate legal entity and a common seal.
In law a company can be defined as a fictitious but legal person that can enter into contract sue others and being sued by others, having a banning A/C in its own name owe money or be a creditor and can do any other things which it has been formed.
Characteristics of a Company:-
(a) Voluntary association
(b) Independent legal entity
– A company is distinct and separate from its members.
(c) Limited liability
Usually the liability of a company is limited to the extent of unpaid value of shares held by the members.
(d) Common seal
The company acts through natural persons called directors. The directions are the agents of the company.
All the act of the company are authorized by its common seal. The common seal is the official signature of a company. Any document not bearing the common seal will not binding on company.
(e) Transferability of shares:-
Usually in a limited company shares are freely transferable. But in the case of a private limited company share are transferable subject to conditions laid down by the company’s articles.
(f) Perpetual existence;-
In this case the life of a company is perpetual and so it can never be affected by the life of its members.
TYPES OF COMPANIES
1. STATUTORY COMPANIES
These are companies formed by a special act passed in parliament. Usually such companies are established in order to carry out some special public undertaking requiring extra – ordinary power and privilege.
Such companies are established not to earn profit but serve people.
2. GOVERNMENT COMPANIES (PARASTATAL COMPANIES)
These are companies which not less than 51% of its issued paid up capital is held by the central government.
3. REGISTERED COMPANIES:-
These are companies formed and registered under companies acts. Here in Tanzania it is the 1961 act cap. 212. Such companies may be limited by shares guarantee or unlimited companies.
1) Companies limited by shares:-
In this case the liability of members is limited into the extent of the unpaid value of the shares held by them.
2) Companies limited by guarantee:-
In this case the liability of members is limited to the amount that they undertake to contribute in the event of bankruptcy.
3) Unlimited companies:-
In this case the liability of members is not restricted.
FORMATION / FLOATATION OF A COMPANY
It is the promoter who thinks about the idea of a business to be carried out by a proposed company.
They undertake extensive investigations to its successful operation viability and feasibility.
They then prepare the following documents and send them to the register with a request to register the company.
1) Memorandum of Association
– It is the main document of a company.
– It is a charter or constitution of a company’s power and scope of operation.
This document contains the following things:-
(a) The name of a company with the world Ltd at the end of the name. Name clause
(b) The objective of a company i.e. the purpose of formation. It should state:-
(i) The main of the company’s objective
(ii) Objective incidental to the main objectives.
(iii) Others objectives.
(iv) Objective clause
(c) A declaration that the liability of a members is limited ”liability clause”
(d) The domicile of the company i.e. the place of the company’s registered office , situation clause.
(e) Association clause:-
Under this clause it is stated here that people putting their signatures to the memorandum are desirous of forming themselves into company.
The memorandum should be signed by at least two persons in the case of a private company and seven persons in the case of a public company agreeing in both case to take up to at least one share each.
2). ARTICLES OF ASSOCIATION:-
It is a document defining rules and regulations for the conduct of the company’s business.
It establishes a contract between the company on one hand and the shareholders on the other and between the shareholders.
It has the following content:-
a) Share capital and its division into various types and the right attaching there to.
b) Direct their members power duties and qualifications
c) Proceeding of the directors meeting general and extra ordinary investing.
d) Calls on shares.
e) Common seal.
f) Accounts and Audit.
g) Forfeiture of shares.
h) Dividend and reserves.
i) Voting rights of members.
j) Notices
3). A statement of nominal capital:-
It specifies the different classes of shares that comprises the share capital of a Company.
4). A list of persons who have consented to act as directors.
5). A written consent by the directors to act in that capacity.
6). A written undertaking by the directors to take up and pay for their qualification shares.
7) Particulars of directors and secretary.
8) A notice of the address of the company’s registered office.
9) A declaration by a solicitor, attorney, accountant or secretary that all the requirements of the company’s acts have been complied with.
On receipt of such documents the register will then scrutinize them to see to it that they are okay and if he find them to be order he will issue or certificate of incorporation (after payment of the registration fees.)
This certificate signifies that a company has legal existence the register then will put the name of the company into the register.
A private limited company may commence a business on its incorporation but not for the public ltd company.
The caller has to receive a certificate of commencement of business Trading certificate) prior to its commencement of business.
A private company is a company which by its articles:-
(i) Does restrict the rights of its shareholders to transfer shares.
(ii) Limit the number of its shareholders to fifty excluding the post and present employees who are also the members of the company.
(iii) Does not invite the public to the subscription of shares or debentures.
A public Ltd company is a company which is not as private Ltd company i.e. it does not observe any of the above characteristics;-
Before receiving the trading certificate the private Ltd Company has to issue a prospectus and its copy then being kept by the register.
A prospectus
This is a circular, advertisement or any document inviting offers from the public to the subscription of any shares or debenture of anybody corporate.
The prospectus invites public to buy its shares or debentures in order to raise the necessary funds.
Some of the matters contained in this prospectus:-
(i) Contents of the memorandum.
(ii) Names and addresses of the directors.
(iii) Names and addresses of the auditor if any.
(iv) Qualification and remuneration of the directors.
(v) The minimum subscription and the amount payable on application and allotment.
(vi) Brokerage or underwriting commission on placing shares or debentures.
(vii) In case of already established company import by the auditors about the dividend or profit paid in each of 3 proceeding years.
ALLOTMENT OF SHARES:-
After the issue of prospectus, the prospective investors will start applying for the shares, through filling in application forms and paying application money (which should at least be 5% of a face or normal value a shares.)
If the application do not amount to the minimum subscription within 40 days of the issue of the prospective then the whole application money has to be refunded by the directors to the applicants within 8 days, otherwise they will liable to repay it with 5% interest as a penalty.
If the applications amount to the minimum subscription then the directors will start considering each application. They may allot the full number of shares applied for or less than that or none at all without giving any reason.
CLASSES OF SHARES:-
What is a share?
Shares are unit of uniform values into which the share capital of the company is divided.
What is share capital?
Share capital is the sum total of the nominal value of shares of a company.
(a) Ordinary shares or Equity shares;-
Do not give preferential rights in respect of fixed dividends and in regard to the repayment of capital in case of winding up.
(b) Preferred ordinary shares; Have a right to receive dividends after the preference shareholders have received their dividends.
(c) Deferred ordinary shares:-
Have a right to receive dividend after the preferred ordinary shares, have received their dividend.
(d) Preference shares:-
Give preferential rights in respect of a fixed dividend and in regard to the repayment of capital in case of winding up.
(e) Cumulative preference shares:-
In this case any arrears of dividend go on accumulating until paid up.
(f) Participating preference shares:-
Entitle their holders to receive not only a fixed rate of dividend but also share in the surplus profit after the other classes of shareholders have received their specified rate of dividend.
(g) Guaranteed preference shares;
Entitle their holders to receive a fixed rate of dividend quarantined by vendors or any third party. In case of a bad year (i.e no profit declared the guarantees have to pay the guaranteed dividend out of their personal recourses.).
(h) Deferred founder or management shares:-
Have a right to receive dividend after all other classes of shareholders have received their dividend.
Such shares do belong to promoters or founders of the company. When shares are offered to the public, the cost of such shares is usually payable by installments. The installments may be made of application allotment and calls.
A call is the amount of installments payable for each share following the installments payable on allotment.
When the company allots the shares, it signifies acceptance of the offer made by the applicants, when the prospective investment apply for the shares, this does not guarantee that they receive such shares money may be refunded to the unsuccessful applicant with a letter of regret. On allotment a binding contract will exist between the company and their shareholders.
ISSUE OF SHARES
Shares may be issued by a joint stock company for different consideration:-
(i) For consideration other than cash: In this case the company may purchase a running business and pay money / consideration to the vendors in the form of shares.
(ii) For cash: – In this case shares can be issued at (a) part (b) premium Discount.
(a) At par:-
In this case the shareholders are required to pay the nominal value of the shares.
(b)At premium
In this case the shareholders are required to pay more than the nominal value of the shares. That is shares are issued at a profit for example a share of Tsh. 100 being issued at Tshs. 110, Tshs, 10 is the premium.
(c) At discount:-
There are some restrictions on issuing shares at a discount but all the same the shares are issued at less than the nominal value. For example a share of 10 Tshs being issued at Tshs. 9, Tshs. 1 is the amount of discount.
Issue of shares at a premium:-
When the company issues shares above par, the excess termed as premium is held in a separate account called share premium A/c in accordance with the requirements of the company Act. The amount of share premium is called a capital gain and it is usually recorded in the balance sheet on the liabilities side under “Reserve and surplus”.
The share premium can be used in the following ways:-
(i) To pay up the un issued shares for nglish-swahili/distribution” target=”_blank”>distribution to member as bonus shares.
(ii) To write off preliminary expenses in the formation of a company.
(iii) To write off expenses on issuing shares or debentures..
(iv). To write off commission paid or discount allowed on issuing shares and debentures.
(v). To provide for a premium payable on redemption usually the amount of share premium is payable for in a lump sum on allotment
ENTRIES:-
(a) On amount being due
DR. Application allotment A/c
CR. Share capital A/c
CR. Share premium A/c
(b) When the allotment money is received:-
Dr. Cash / Bank A/c
Cr. Application and allotment A/c