COM4: CERTIFICATE OF INCORPORATION

This unit is about the certificate of incorporation and all other terms used in commerce and companies.

 

CERTIFICATE OF INCORPORATION

It is a document that gives the company a separate legal entity of its own, independent of its members. This is when the necessary fee is paid and the registrar of companies is satisfied that all documents submitted in are in order. It brings the company into existence. It is a birth certificate of the company.

NB

At this level, a private limited company may start transporting business. However, for a public limited company another document called a prospectus must be issued by the company to the public to raise enough minimum capital. After the registrar is satisfied, he then issues a trading certificate.

  • A trading certificate.

A trading certificate is a document issued to a public limited company allowing it to start transacting business. This is after the above conditions of raising the minimum capital has been fulfilled

  • A prospectus

This is a document drawn b shares or debentures of the company. It must bear the following the directors inviting the public to subscribe for the shares of the company. It is a notice circular advertisement or their invitation offered to the public for purchase of any shares or debentures of the company. It must bear the following information;

  • The name, address and description of directors
  • The minimum subscription on which directors may start to allot the shares
  • Details of any property acquired by the company and the amount paid or payable in cash.
  • Details of any voting rights of each class of shares
  • The name and description of each promoter to whom any amount as commission is paid
  • The number and amount of shares and debentures issued or agreed to be issued.

 

  • Shares

A share is a unit of the company’s authorized or normal capital contributed by a member. In return to the share contributed, a member expects to earn a dividend which is the company’s profits distributed members. Shares are divided majorly into two categories; ordinary shares and preference shares. The other is differed shared.

  • Ordinary shares

These are a type of shares which have fixed rate of dividend on the company profits. They take the reminder of the profits after preference share have been paid. They are mainly by the period when the company makes little profits they stand to lose (no dividends) however, if a lot of profit is realized then they take a big share of the profits (a lot of dividends)

  • Preference shares

These are a type of shares which have fixed rate of percentage of a company profits and are given first consideration. They are paid first before ordinary shareholders are paid. They are categories into cumulative, participating, redeemable and irredeemable.

  • Deferred shares

They are referred to as founder’s shares. They are called deferred because the right to receive dividends on them is deferred in favor of the holders of the ordinary shares. They do not become entitled to receive any dividends unless the holders of ordinary shares have received a dividend at a specified rate.

  • Cumulative preference shares

These are shares whose holders are entitled to dividends, irrespective of whether the company has profits or incurred losses in a trading period. The holders’ dividends are carried forward to the following trading seasons in case losses are made. They keep accumulating year after ‘cumulative’.

  • Non-cumulative preference shares

These are where shareholders are entitled to a fixed rate of dividends, but for only the trading season for which a dividend is declared. There is no accumulation of arrears in case where losses have made.

  • Redeemable preference shares

These are shares that can be bought back by the company from the holder after a given specified time. They are normally issued when the company wants capital temporarily

  • Irredeemable preference shares

These are shares that cannot be brought back by the company. The owners only cash them by selling them through a broker a task exchange market.

  • Participating preference shares

These are shares that carry a fixed rate of dividends and the holders are entitled to any given extra profits that remain after all shareholders have got their shares.

 

DEBENTURE

A debenture is a unit of a loan to the company. It is an instrument or document that evidences that the company has borrowed money (stated) from the named person. A fixed rate of interest is paid to the debenture holder. This is paid whether the company is making profit or loses. This need to borrow a rises from the fact that authorized capital is insufficient.

Types of debentures

  • Naked debenture

No company property is pledged against them ie the company goes bankrupt; the holder of the naked debenture runs the risk of not being paid. They are also referred to as unsecured debentures.

  • Mortgaged (second debentures)

Company property is pledged against them ie if the company goes bankrupt; the holders are entitled to the property pledged against them. This is why they are referred to as secured debentures.

  • Redeemable debentures

These are debentures that are bought bank (redeemed) by the company after a specified period of time.

  • Irredeemable debentures

These are denatures where money borrowed against them remains outstanding until the company is liquidated (dissolved). The holders cannot let them back until the company is wound up.

 

 

DIFFERENCES BETWEEN SHARES AND DEBENTURES

SHARE HOLDERSDEBENTURES
i. Get dividendsi. Get interest
ii. A share is a unit of a capitalii. It is a unit of a loan
iii. Have voting rightsiii. Have no voting rights
iv. Are owners of the companyiv. Are creditors of the company
v. In case of losses they may get no profitv. They are entitled to interest even when losses are made.
vi. Shares are usually irredeemablevi. Debentures are usually redeemable

The capital structure of a liability company

  1. The authorized capital/nominal capital/registered capital

This is the maximum amount of money that a company is allowed as a business to operate by on selling the shares. This is stated in the capital clause of the memorandum of association. This could be 1,000,000sh.

  1. The issued up capital

This is the amount raised after issuing part of the shares. The company may decide to issue 800,000sh worth shares leaving. The 200,000sh worth shares un issued. This is called unissued capital.

  1. Called up capital

This is the amount called up on the shares issued to the public but of the 800,000sh worth shares issued. The directors may call upon members to raise 600,000sh. This means that 200,000sh not call up and it is referred to as un called up capital.

  1. Paid up Capital.

Quite often, members fail to pay what they are called upon to pay. In the above example after they are called upon to pay 600,000sh they end up paying only 500,000sh. This is paid up capital. The remaining 100,000sh is what is referred to as unpaid up capital.

NB

Unpaid up capital is sometimes referred to as calls in areas or capital in areas.

Distinguish between natural growth and amalgamation as form of expansion of a business establishment

  1. Natural growth

This is when a firm grows because of the deliberate policy by the owners by ‘ploughing’ back the profits. This is done when part of the profits are misted back in business to expand the capital.

Alternatively the owners may invite new partners in the business increasing the capital to enable expansion. This growth can move from one man’s business to a partnership, private limited company and then a public limited company.

  1. Amalgamation or combination

This is the process of 2 or more firms combining their operating their operations in order to enjoy economies of sales eg 2 schools may decide to combine to form large school. Amalgamation or combination is also when a number of firms, ‘business’ running independently come together at different level and forms as illustrated below;

  1. Complete amalgamation/consolidation

This is when companies dissolve and create a completely new company to take over their business eg Kakira Sugar Works Limited and Kinyara Sugar Works Limited can dissolve them to form one sugar firm Kinyakira Sugar Works Limited.

  1. Absorption or merger

This is when one company takes over the business of another company or companies eg in the above example Kinyara Sugar Works Limited. This leaves the absorbing company maintaining its original name.

  • Holding company

This is when a company extends/expands its size by bringing another company under its control. Various companies entering into contribution retain their entities while one of them acquires control over the others due to the shares held in them. This comes about when the controlling company acquires 51% or more shares in the other companies. The controlling firm is called the HOLDING COMPANY while the controlled firms are called SUBSIDARY COMPANIES.

  1. Cartel

Under this arrangement, various companies agree to sell their products through a central selling agency. This is done to establish a mono poly where only members are allowed to sell thru the agency. Their aim is to influence and direct the price variations to their advantages; therefore in principle they do not amalgamate.

Distinguish between vertical and horizontal combinations as lines of combinations [under mergers]

  1. Vertical integration

This is when firms involved in the production of a product at different stages and levels integrate (combine) eg cotton growing, ginning, spinning, cloth making and clothing marketing firms can vertically combine to become the textile industry under one control.

  1. Horizontal integration

This is when firms involved in the production of a product at the same stage and level integrate (combine to come under one combine to become one Z.

Why do business units merge?

  • To increase production
  • Produce at a high level to enjoy economies of scale
  • To minimize costs of production
  • To ensure use of potential labour availability
  • To avoid high level of taxation
  • Eliminate wasteful competition
  • Achieve greater efficiency in management

What factors can / may limit the merging of firms

  • Different forms of technology used in the production b different firms[nature of technology]
  • Production of very different / unrelated goods [ nature of goods]
  • Lack of geographical proximity of firms [ location of firms]
  • Owners of different firms may have dimargent interests ie motive vs rendering services
  • Size nature of business firms.

ASSIGNMENT : CERTIFICATE OF INCORPORATION assignment MARKS : 10  DURATION : 1 week, 3 days

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