a) Indicate two differences between Articles of Association and Memorandum of Association.
b) State four advantages and four disadvantages of a public limited company.
Explanation
(a) Differences between a Memorandum of Association and An Article of Association:
- A memorandum of association contains all the conditions required for the registration of a company while articles of association contain only the rules and regulations of the company.
- A memorandum of association contains names of promoters, authorized capital and the amount of capital contribution while articles of association contain the rights of shareholders, directors and procedures of conducting meetings.
- A memorandum of association defines the relationship between a company and its external parties while articles of association govern the relationship between the company and its members.
(b) Advantages of a Public Limited Company:
- Large capital: a public limited company can easily raise capital as a result of many shareholders that subscribe to its shares.
- Legal entity: it has a legal existence, therefore it can sue and be sued.
- Access to loans and overdrafts: it can easily obtain loans and overdrafts from financial institutions
- Retained profits: it can plough back some of its profit into the business.
- Easy access to trade credit/hire purchase: because of its size, a public limited company can purchase raw materials on credit from other organisations
- Perpetual existence: it has a long life span once it does not face liquidation, like the death or withdrawal of a shareholder does not affect the existence of the company.
- Easy transfer of shares: shares can easily be bought and sold through the stock exchange.
- Limited liability: it enjoys limited liability as shareholders cannot lose more than what they have contributed to the company.
- Employees can also become owners by purchasing shares from the company.
Disadvantages of a Public Limited Company:
- Lack of privacy: the company is mandated to publish its annual accounts to members of the public which makes it impossible to maintain secrecy.
- Slow decision making: this exists as a result of the need for consultation within the management hierarchy.
- Conflict of interest: there is the possibility of a conflict of interest among the shareholders, directors and staff, which in the long run may affect efficiency in the operations of the business.
- Expensive to establish: it is expensive to establish because of the high cost involved in the procedures and documentation.
- Separation of ownership from control: the shareholders are not involved in the management of the company and the people saddled with this responsibility may not put in their best.
- Heavy tax burden: the public limited company pays heavy tax arising from the profit declared.
- The limited scope of operation: the Company can only carry out business activities which are provided for in its memorandum of association and cannot venture into other activities without approval during the Annual General Meeting (AGM).