LSA LAVAL ECONOMICS NOTES BUSINESS UNIT PART

JOINT-STOCK (LIMITED LIABILITY) COMPANY

Definition: This consists of an association of people who contribute towards a joint stock of capital for carrying
out business with the view of making profits. It is a legal person created to engage in business, capable of
owning productive assets, enter into contracts and employ labour in the same way as an individual.
Ownership: shareholders own joint - stock companies. Shareholders are those who have contributed to the
capital stock of the business by buying shares sold by the company. A shareholder can be either an individual or
a group of persons or an institution.

CHARACTERISTICS OR FEATURES OF A JOINT-STOCK COMPANY:

(i) Limited Liability: The liability in a joint-stock company is limited to the amount each shareholder has
contributed in the business, in case of bankruptcy; each shareholder shall loss just the amount contributed as
shares.
(ii) Separate Legal Entity: A limited liability company is separated from its owners, to sue and can be sued,
capable of owning its own assets, enter into contract, employ labour in the same way as individuals. The
Certificate of Incorporation guarantees this separation.
(iii) Formation Process: Joint-stock company have to be authorized by the Registrar of Companies (the
Registrar of the Court of First Instance in Cameroon sitting in for the Registrar of Companies). Thereafter,
this company has to be registered at the Ministry of Trade and Industry, in the case of Cameroon.
(iv) Separation of Ownership from Control: Shareholders are the owners of the company but control is in the
hands of paid directors who have the skills and experience of business management. This has ensured that
those who have the capital without business knowledge can take part in business.
(v) Transferability of Shares: Shareholders are free to sell their shares without seeking the consent of other
shareholders. In case a shareholder needs cash, he can easily convert his shares into cash in a financial
market.
(vi) Number of Shareholders: The number of shareholders ranges from two to infinity for both private and
public limited companies.
(vii) Ending of their Names: The names of joint-stock companies have a particular manner in which they end.
The name of a private limited company will end with Ltd. While that of a public limited company will end
with PLC.
(viii) Publication of Accounts: Joint-stock companies are, by law, expected to publish their accounts annually
after an approved auditing.
(ix) Election of a Board of Directors: Members of the Board of Directors who carry out the day-to-day
running of the business are usually elected in a general assembly of shareholders. This board is usually made
up of some shareholders and paid directors.

FORMATION OF A JOINT-STOCK COMPANY:

The initiative to form a joint-stock company is conceived by those we call Promoters. They undertake
to fulfil the legal formalities as required by law to form a company. They have to furnish the Registrar of
Company with the following documents: Memorandum of Association and Articles of Association.
(a) Memorandum of Association:
This is a document, which contains the rules and regulations that govern the external relationship
between the company and the external business world. It contains the following details:
(i) The objectives of the company.
(ii) The liabilities of the company.
(iii) The liability of shareholders, that is, it has to be stated that the liabilities of shareholders are limited.
(iv) The address of its registered head office and its branches and other offices.
(v) The lifespan of the company, that is, whether the company’s activities will last for specified duration or as a
going concern.
(vi) The amount of authorised capital, that is, the maximum amount the company is allowed to raise.
(vii) It should be signed by at lest 2 persons if it is a private limited company and at least 7 persons if it is a
public limited company.
(b) Articles of Association:
This is a document which contains the internal rules and regulations governing the company. It contains
the following:
(i) The manner in which shares will be issued and transferred.
(ii) The company’s borrowing power.
(iii) The rights of the different classes of shareholders.
(iv) The frequencies and types of company meetings.
(v) The manner in which the company will elect its officers.
(vii) The powers, qualifications and duties of directors.
(viii) The appointment of auditors, their functions and the method of remunerating them.
(ix) The method of appropriating the company’s assets in case of liquidation.
If the Registrar of Companies approves these two documents, he will issue the Certificate of
Incorporation.
(c) Certificate of Incorporation:
This is a document issued by the Registrar of Company to promoters of a company, which marks the
birth of a new company. It shows that a new company has been formed. It signifies the following:
(i) That a new company has been formed.
(ii) That this new company has a separate legal entity, that is, it is a legal person different from its owners, can
sue and can be sued.
(iii) If the company is a private limited company, it will commence business immediately but if it is a public
limited company, it will have to apply for authorisation from the Registrar of Company to sell shares to
members of the general public. This application is called a Prospectus.
(d) Prospectus:
This is a document issued specifically by a public limited company, inviting the public to subscribe
shares in the company. This document is lodged with the Registrar of Company before subscription of shares
commences. It contains the following:
(i) Detailed statement of the history of the company.
(ii) Its profit record.
(iii) Its assets.
(iv) Its future prospects.
(v) The capital structure of the company
When the Registrar of Companies has approved the prospectus, he will issue a Certificate of Trading
(e) Certificate of Trading
This is a document, which authorizes the public limited company to commence business. Once a public
limited company receives the Certificate of Trading, it means they have been given the go-ahead to start
operating by issuing (selling) shares to members of the public.
TYPES OF JOINT-STOCK COMPANIES:
(a) Private Limited Company: This is a type of joint-stock company, which is owned and managed by a
person, his relatives and friends. Its shareholders range from 2 shareholders to no limit as to the number of
shareholders (infinity). Its name ends with the letters “Ltd” meaning that the liabilities of the shareholders
are limited. It cannot appeal for public subscription of shares and are not permitted to transfer shares without
the consent of the other shareholders. Examples include Chariot Construction Ltd, Mukete Plantation Ltd,
etc.
(b) Public Limited Company: This is a type of joint-stock company, which is owned by shareholders and
managed by a Board of Directors elected by shareholders. Its shareholders range from 2 shareholders to no
limit as to the number of shareholders (infinity). Its name must end with the letters “PLC” meaning that it
has limited liabilities and can sell shares to members of the public. Its shares are easily transferable without
seeking the consent of anybody. Examples include The National Refinery Corporation (SONARA) PLC, the
National Aluminium Industry (ALUCAM) PLC, etc.
ADVANTAGES OF JOINT-STOCK COMPANIES:
These are the advantages, which joint-stock companies have over all other forms of business units when
compared.
(i) Limited Liability: Joint-stock companies have a separate legal entity and capable of taking care of its debts
in case of bankruptcy. Creditors of the business cannot confiscate the private property of the shareholders.
(ii) Enjoy Economies of Scale: Joint-stock companies are capable of enjoying economies of scale because they
are capable of operating in large scale. Therefore, the costs-saving advantages that accrue to a firm when it
operates in large scale shall accrue to joint-stock companies.
(iii) Attract Large Capital: Joint-stock companies can raise capital through the sale of shares of different
denominations. Both small and large savers have the opportunity to do business. Equally, with their large
assets, they can obtain huge loans because they have valuable security for payment.
(iv) Separation of Ownership from Control: Owners of joint-stock companies are different from those who
control the company. Shareholders are the owners of the company while paid directors are those who carry
out the day-to-day management (control) of the business. This is advantageous because those without
business knowledge can become shareholders in a Joint Stock company.
(v) Transferability of shares: Shares in joint-stock companies can easily be transferred from one person to
another. Any shareholder who, for one reason or the other, is no more interested in the business can easily,
without consulting or seeking the consent of the others, sell his/her shares.
(vi) Prospects for Continuity: In the event of the death or incapacitation of a shareholder, the business
activities of a joint-stock company cannot be interrupted. The business will continue into the near future.
(vii) Encourages Investment: Because the owners of Joint Stock companies are different from the
management, even those without business knowledge are encouraged to invest by buying shares.
(viii) Publication of Accounts: Joint-stock companies are, by law, required to publish their financial accounts
annually, this enables the shareholders and members of the public to know the exact financial situation of the
business. This protects investors and acts as an incentive to hard work by managers.
DISADVANTAGES OF JOINT-STOCK COMPANIES:
(i) Lengthy and Expensive Formation: To form a joint-stock company is not only strenuous but also
expensive. It takes a long time to put all the documents together and expensive to do so. This tends to
discourage many people from venturing into it.
(ii) Slow Decision Making: A lot of consultation has to take place before any decision is made. This takes a
long time before any decision is made. This therefore goes a long way to slow down the growth of the
company as decisions could not be taken fast to ameliorate a situation.
(iii) Diseconomies of Scale: Joint-stock companies are large-scale companies experiencing diseconomies of
scale. The disadvantages that accrue to firms when they grow large will befall them such as high costs of
production, pollution, congestion, etc.
(iv) No Privacy in Business Records: Joint-stock companies are legally supposed to publish their accounts
annually for the members of the public to see. Thus, there is no secrecy in the way joint-stock companies are
managed.
(v) Conflict of Interest between the Shareholders and Management: Shareholders are interested in profit
maximization while management is interested in increasing sales and the size of the company. In this light,
management will prefer to re-invest a large portion of profits that are made to increase the company’s capital
while shareholders prefer to share a large proportion of profits made to increase the size of their dividend.
(vi) Management Difficulties: One of the difficulties large firms like joint-stock companies face is that of
management. It becomes very difficult to coordinate the affairs of all the departments and ensure efficiency,
commitment and discipline for all the workers. Communication difficulties sets in. information takes a long
period of time to leave the top to the bottom and vice-versa.

COMPARISON OF PRIVATE AND PUBLIC LIMITED COMPANIES:

(a) SIMILARITIES BETWEEN PRIVATE AND PUBLIC LIMITED COMPANIES:
(i) Formation: The promoters of both the public and private companies are to furnish the Registrar of
Companies with the Memorandum and Articles of Association as application towards the formation of a
company.
(ii) Legal Entity: Both companies have separate legal entities bestowed on them by the Registrar of Company,
who issues the Certificate of Incorporation.
(iii) Limited Liability: Both companies’ shareholders have limited liability, that is, in case of business failure;
the shareholders shall forfeit only the amount of money they have contributed to the business.
(iv) Management: The management of both companies are in the hands of the Board of Directors with the day-
to-day management in the hands of paid directors elected by shareholders.
(v) Profit Motive: Profit maximization is the main, though, not the only motive for both the public and the
private companies. This profit will be used to pay dividends to shareholders, interest to debenture holders,
plough-back, etc.
(vi) Separation of Ownership and Control: In both companies, ownership is separated from control.
Ownership is in the hands of shareholders while control is in the hands of paid directors.
(vii) Prospects of Continuity: In the event of the death of a shareholder, the business life of both companies
continues uninterruptible because of the easy transferability of shares even to the deceased’s successor or a
shareholder can easily sell his share. The both have numerous shareholders thus making the effect from one
shareholfer tobe insignificant.
(viii) Number of Shareholders: By the new Company Act of 1995 in Britain, both companies are supposed to
have at lest 2 shareholders and no maximum of shareholders.
Note: The word “public” in Public Limited Company means that the shares of this company is sold to members
of the public and it does not mean that it is owned by the government.
(b) DIFFERENCES BETWEEN PRIVATE AND PUBLIC LIMITED COMPANIES:
(i) Documents Needed to Start: The Private Limited Company starts operating when it receives a Certificate
of Incorporation while the Public Limited Company needs a Certificate of Trading in order to start business.
(ii) Transferability of Shares: Shareholders of a Private Limited Company can transfer their shares only with
the consent of other shareholders while shareholders of a Public Limited Company can freely transfer their
shares without seeking anybody’s consent.
(iii) Endings of Names: Private Limited Companies have at the end of their names “Ltd” whereas Public
Limited Companies have “PLC” at the end of their names.
(iv) Publishing of Accounts: Private Limited Companies are not obliged to publish their accounts while the
Public Limited Companies are obliged to publish its accounts to the public.
(v) Number of Directors: The least number of directors required in a Private Limited Company is one while
the Public Limited Company is required to have at least two directors.
(vi) Method of Raising Capital: Public Limited Companies can appeal to the general public foe additional
capital by selling out new shares whereas the Private Limited Companies can raise additional capital by
asking existing shareholders to buy more shares.
(vii) Amount of Capital to Start: A Private Limited Company may commence business with any amount as
capital whereas a Public Limited Company has a stated amount as capital before it can start business.
THE CAPITAL STRUCTURE OF A COMPANY
The Share Capital of a Limited Liability company is divided into various kings of shares. The number of
these shares bought constitutes the size of the capital of the company. When a share is bought, a document is
issued as evidence of payment. This document is called a Share Certificate.
(a) Authorized (Nominal) Capital: This is the maximum amount of capital that a company is permitted to
raise. The authorized capital is usually stated in the Memorandum of Association.
(b) Issued or Called-Up Capital: This is that part of authorized capital of a company, which has actually been
issued to shareholders. Any authorized but not issued capital remains available for issue when the need
arises.
(c) Paid-Up Capital: This is that part of authorized capital of a company that has actually been paid for by
shareholders.

SHARES
Definition: A Share is one of a number of equal portion in the nominal capital of a company contributed by
individuals and institutions that entitled them to a portion of the distributed profit and the residual value of the
company’s assets if it goes into liquidation. Those who make these contributions are called Shareholders. A
document that carries the official seal of the company and issued to shareholders as evidence of the contribution
to the share capital of a company is called Share Certificate. Holders of this certificate (shareholders) are
entitled to a share of the distributed profit called Dividend. Shares are of two types: Preference Shares and
Ordinary Shares.
(a) Preference Shares:
Definition: These are a portion of the nominal capital of a business that is contributed by an individual or an
institution and it entitles the holder to a fixed rate of dividend. They receive their dividends only after debenture
holders have been paid but before ordinary shareholders. They usually have little to say in the management of
the company. In the event of liquidation, the preference shareholders shall be settled first before any other type
of shareholder. There are two classes of preference shares: Cumulative Preference Shares and Participating
Preference Shares.
(i) Cumulative Preference Shares: These are a class of preference shares where holders are entitled to
dividends that must be paid in arrears whenever the company makes a profit. In some years, the company
might make no profit at all and so, holders of this class of shares will receive no dividends for that year, all is
not lost. This amount will be postponed to the year when the company makes profits. When this happens and
 there is enough profits for distribution, holders of this class of preference shares will be paid the entire
amount (arrears) to be paid before any dividends can be paid to ordinary shareholders.
(ii) Participating Preference Shares: These are a class of preference shares where holders are entitled to an
additional share in the profit after ordinary shareholders have received some minimum rate of returns. This is
a compensation for taking part in the management of the business. This means that when profit is made,
holders of participating preference shares will first receive their fixed rate of dividends. Then after ordinary
shareholders are paid a minimum on their returns, an additional payment is made to participating preference
shareholders for participating in the management of the business.

(b) Ordinary Shares:

Definition: They are also called Equity. It is that portion of the nominal capital of a business that is contributed
by individuals and institutions, is entitled to a non-fixed dividend, and depends entirely on the profitability of
the company and the policy of the management about the amount of profit to be retained in the company. They
are entitled to a residue of profit after all other claims have been met, that is, they are paid the last from
whatever amount is left after payments for other expenses have been made. This shows that ordinary
shareholders bear the greatest risk and because of this, they have the greatest say in the management of the
business and have voting rights in the general assembly.
(c) Debentures
Definition: These are documents (Loan Certificates) that acknowledges that the holder has lent a specified sum
of money to the company on a fixed rate of interest for a specified period. Whether the company makes profit or
not, interest on Debentures are to be paid. Therefore, holders of debentures are Creditors to the company and
not owners (shareholders). It is a kind of I. O. U (I Owe You. Debentures take different forms: Redeemable,
Irredeemable, Mortgaged and Naked Debentures.
(i) Redeemable Debentures: This is a loan acknowledgement, which the debenture holder is due to redeem (to
be paid) on a specified date. It means that the company is obliged to pay back to the debenture holder the full
value of its redemption value, that is, the remaining amount to be paid to the debenture holder in full on or
before the maturity date.
(ii) Irredeemable Debenture: This is a loan acknowledgement, which the debenture holder has no specific date
to redeem (to be paid). It means that the company is under no obligation to pay at all or if willing to pay, is
under no obligation to pay on a specified date.
(iii) Mortgaged Debentures: this loan acknowledgement has the assets of the company as collateral, that is, in
the event that the interest and redemption pay are not made, the Lender or the Mortgagee can seize and sell
to recover the loan. It is also called Secured Debenture. Assets that can be mortgaged include landed
property, building, share certificate, etc.
(iv) Naked Debentures: this loan acknowledgement does not have an asset of the company as collateral. It is a
very risky loan since there is no guarantee of loan repayment. The debenture holder has only court action as
an option if the company fails to pay the loan.
DIFFERENCES BETWEEN A SHARE AND A DEBENTURE:
(i) Those who buy shares of a company (shareholders) are the owners of the company whereas those who buy
debentures (debenture holders) are creditors of the company.
(ii) Returns to a shareholder for contributing to the capital of the company is called dividend whereas returns to
debenture holders for lending to the company is called interest.
(iii) At the end of the financial year, debenture holders are paid first while shareholders are paid later (after
debenture holders have already been paid).
(iv) Dividend paid to shareholders is only done when the company makes profits while payments to debenture
holders are done whether the company makes profits or not, that is, it does not depend on the profitability
of the company.
(v) Debenture holders bear no risk in business because in an event of business failure, they will recover their
money while shareholders bear all the risks associated to business (are not sure to recover all their money
if the company liquidates).

CAPITAL GEARING OF A COMPANY

Definition: This is the ratio of a company’s loan capital to its risk capital, that is, the ration of loan capital
(Debentures and Preference Shares) to its risk capital (Ordinary Shares). Loan capital consists of that part of
capital that is entitled to fixed returns.
When the ratio of the loan capital (amount from debentures and preference shares) is greater than risk
capital (amount from Ordinary Shares), we call it High Gearing. On the other hand, if the ratio of the loan
capital (amount from Debentures and Preference Shares) is lesser than that of risk capital (amount from
Ordinary Shares), we call it Low Gearing.
Example: A public limited company issued 2,000 ordinary shares at 10,00FCFA per share and 1,500FCFA
preference shares at 25,000FCFA per share and 500 debentures at 10,000FCFA. What is the gearing of this
company?
Solution
Ordinary shares (2,000 X 10,000FCFA) = 20,000,000FCFA
Preference shares (1,000 X 20,000FCFA) = 20,000,000FCFA
Debentures (500 X 10,000FCFA) = 5,000,000FCFA
Therefore, Gearing = ratio of ordinary shares and (Debentures + Preference Shares)
= 20,000,000 : (20,000,000 + 5,000,000)
= 20,000,000 : 25,000,000
= 4 : 5 Thus, this is High Gearing.
DIVIDEND AND YIELD
(A) Dividend:
This is the return on the nominal value of the share. By nominal value, we mean the face or per value
and it is calculated as:
Dividend = Rate of dividend X Nominal value.
(B) Yield
This is dividend expressed as a percentage of the market value of the share. It is the return on the current
price of the share. It is also known as the Current Rate of Interest or Market Rate of Interest. It is calculated as:
Dividend 100
Yield  X .
Market Price 1
There is a relationship between the market price and the rate of interest. When the market price is rising,
the current rate of interest will be falling. On the other hand, when the market price is falling, the current rate of
interest will be rising. This shows that the current rate of interest is inversely related to the market price of the
share.
Example: At the end of the year, a company declared 30,000,000FCFA as profit. The company has the
following capital structure:
– 1,000, 5% debentures at 10,000FCFA each
– 500, 7% preference shares at 10,000FCFA each
– 1,000, ordinary shares at 10,000FCFA each.
(a) What is the gearing of the capital structure of that company?
(b) Calculate the dividends paid to ordinary shares.
(c) What is the rate of dividend declared on ordinary shares?
(d) If ordinary shares are sold for 12,000FCFA, what will be the yield?
Solution
(a) The gearing of the company is the ratio of ordinary shares to (preference shares + debentures).
Ordinary Share and ( Debentures and Preference Share
That is, 1,000 X 10,000 : (500 X 10,000) + (1,000 X 10,000)
= 10,000,000 : 5,000,000 + 10,000,000
= 10,000,000 : 15,000,000
= 2 : 3 = High Gearing.
(b) Interest paid to debentures
= 5% (1,000 X 10,000FCFA)
= 5% (10,000,000FCFA) = 500,000FCFA
Therefore, dividends paid to preference shares
= 7% (500 X 10,000FCFA)
= 7% (5,000,000FCFA) = 350,000FCFA
Total amount paid out
– Debentures = 500,000FCFA
– Preference shares = 350,000FCFA
Total = 850,000FCFA
Amount remaining after the above distribution is what goes to ordinary shares, that is: 30,000,000 – 850,00
(Debentures + preference shares)
= 29,150,00FCFA
Therefore, the amount paid to ordinary shares is 29,150,00FCFA
C) The amount of dividend on ordinary shares is:
29,150,000
= 29,150FCFA
1000
This amount of dividend paid to each ordinary share is 29,150FCFA. Therefore, the rate of dividend on
ordinary shares is the amount of dividend expressed as a percentage to the normal value of ordinary shares
issued.
Amount of Dividend 100
Rate of dividend  X
Nominal value of ordinary shares 1
29,150,000 100
= X = 291.5%
10,000 1
Dividend 100 29,150 100
d) Yield  X  X = 242.9%
Market price 1 12,000 1

NON-PROFIT MAKING ENTERPRISES

(a) Public Corporation (Public Enterprise)
Definition: This is a business organization that is owned and controlled by the government. The state owns the
capital and appoints the members of the Board of Directors. Public corporation has two main objectives:
(i) Operating in the interest of the public by providing quality goods and services at affordable prices.
(ii) To achieve allocative efficiency through their pricing policy. Pricing policy of public enterprises is that,
prices are charged just to cover their marginal cost (MC = AR).
It is the aim of public corporations not to make profits but if revenue is greater than costs (profit), it is
called a Surplus. When surpluses are realized, they can be used to either reinvest in other public ventures, used
to reduce prices of products produced by the corporation, increase salaries of workers of the corporation and
state employees and to transfer to state treasury. But if losses are realized, taxpayers finance them. Examples in
Cameroon include Cameroon Development Corporation (C.D.C), National Refinery Corporation (SONARA),
National Cotton Development Authority (SODECOTTON), Cameroon Radio and Television Corporation
(C.R.T.V), etc.

CHARACTERISTICS OF PUBLIC CORPORATIONS:

(i) Ownership: Most public corporations are entirely owned by the state. The state and some members of the
public or institutional investors jointly own some.
(ii) Formation: Public corporations are created by a Presidential Decree or an Act of Parliament. In Cameroon,
in particular, solely a Presidential Decree creates it.
(iii) Objectives: The main objective of creating a public enterprise is to provide goods and services to its
citizens at affordable prices. In addition to the above objective, the government wants to achieve allocative
efficiency by its marginal costs pricing policy.
(iv) Management and Control: Public corporations are controlled and managed by a Board of Directors
appointed by the government and supervised by their respective ministers in charge of the business venture.
(v) Sources of Finance: In a situation where a public corporation is entirely owned by the government, the
government provides the entire finance through taxes. However, in a situation where the government (the
majority shareholder) jointly owns the corporation and other private investors, finances come from the
government and other shareholders.
(vi) Risk Bearing: The risk of failure in the business lies with the taxpayers who have to make extra sacrifices
to finance the losses realised.
(vii) Accountability: Management of public corporations is fully accountable to the government. This
accountability breeds efficiency, especially as there will be checks and balances in the handling of finances.
(viii) Size: Usually, most public corporations are large and even larger than most multinational companies are.
This is because the government has all the means to mobilize resources for a large public enterprise.
(ix) Profit Sharing: When profits (surpluses) are realized, it is used to expand the business, reduce prices of the
product in a situation where the entire corporation is owned by the government. But where it is jointly
owned, profits are also used to pay dividends to shareholders.
ADVANTAGES OF PUBLIC CORPORATIONS (REASONS FOR GOVERNMENT OWNERSHIP OF
BUSINESS ENTERPRISES)
(i) Provision of Essential Goods and Services: There are goods and services, which the government considers
essential for the welfare of its citizens. This explains why government provides public and merit goods and
services such as defence, public security, street lights (public goods), public schools, public hospitals, (merit
goods), etc.
(ii) Heavy Capital required and Long Gestation Periods: Companies that require heavy capital investment
such as the construction of hydro-electricity dams, airports, seaports, etc, can only be raised by the
government from taxes and other sources. Also, investments that take a long time before it starts sending out
its product for sale (long gestation periods) discourages private investment.
(iii) Control of Monopoly: some goods are naturally produced by monopolists such as the state in the provision
of water, electricity, etc. Public ownership is preferable to avoid wastage of resources due to competition in
the private sector. Without government monopoly, there will be a network of pipes and cables from different
competing companies, leading to wastage and duplication of resources.
(iv) Social Services: Social services such as education, health, defense and social security are amongst some of
the most vital needs of the society but some of these services are not profitable enough for private firms. This
explains why to maintain regular supply; the state should create and manage such businesses to ensure
regular supply.
(v) Strategic Reasons: Some industries are considered to be of strategic importance to the state. To safeguard it
and avoid its abusive use, the state should create and manage it such as industries producing arms, airlines,
shopping line, etc.
(vi) Developing of Infrastructure: These are some facilities which act as a catalyst in the development process
such as roads, harbour, water, schools, hospitals, electricity, research, etc. this cannot be left in the hands of
private individuals who might not adequately handle it because they are not lucrative.
(vii) Enjoy Economies of Scale: Most public corporations are usually very large in size because the
government can easily raise heavy capital. In addition, they usually operate as monopolist in any market they
find themselves. This gives rise to mass production and possible economies of scale.
(viii) Government Policy: Most corporations are set up by the government to foster some of its policies. For
example, CRTV in Cameroon was created to ensure government communication policy, the central bank,
BEAC to foster the monetary policy of member countries.

DISADVANTAGES OF STATE CORPORATIONS (REASONS AGAINST GOVERNMENT

OWNERSHIP OF BUSINESS ENTERPRISES)
(i) Diseconomies of Scale: Public corporations are operating in large scale and therefore some difficulties shall
arise (diseconomies) due to large scale production and operating many branches across the country. This
produces difficulties in management leading to a fall in efficiency and quality of output.
(ii) Lack of Competition: Most corporations operate as monopolists without rivals. This lack of competition
breeds inefficiency. This explains why costs are not closely monitored because any loses will be borne by
taxpayers.
(iii) Increase in Government Expenditure: Due to inefficiency and political influence like appointing
managers on political reasons and not based on skills. This explains the losses usually experienced and its
survival lies in the continuous government financial and technical supports (subventions or subsidies), thus
increasing government’s expenditure.
(iv) Conflicts between Price and Quality: Consumers will always demand goods of high quality, which they
believe, should be reflected on the price of the good (that is, the good should have a high price as prove of its
high quality). When government enterprises produce these quality products but sell at a subsidized price,
consumers instead question the reality of its high quality on its low price and reduce the demand for them.
(v) Lack of Wider Consumers’ Choice: Government corporations produce standardized products, which do
not give consumers a wider range of choice. Thus, consumers’ love for variety is lost.
(vi) High Level of Embezzlement and Corruption: Much of the resources of public corporations are usually
mismanaged. Embezzlement and corruption has taken a strong hold in most of these corporations. In the
long-run, most of these corporations will not reach maturity as most of their resources are not put into
productive use but enriching private pockets.
 DIFFERENCES BETWEEN PUBLIC LIMITED COMPANY AND PUBLIC CORPORATION
(i) Formation: A Public Limited Company is formed when the founders submit to the Registrar of Company a
Memorandum and Articles of Association and in return, the Registrar will issue to them a Certificate of
Incorporation, which shows that an Act of Parliament or a Presidential Decree has created a joint - stock
company whereas a public corporation is formed.
(ii) Objectives: Public limited companies have as their main objective to maximise profits, which are shared as
dividends to shareholders while the objective of public corporations, is to provide essential goods and
services to citizens at affordable prices.
(iii) Ownership: Public limited companies are owned by individuals and institutions who have bought shares to
become shareholders while public corporations are owned by the government.
(iv) Management and Control: Public limited companies are managed and controlled by the Board of
Directors elected by shareholders during a general meeting while a Board of Directors appointed by the
government does management and control of public corporations.
(v) Source of Finance: The sources of finance for public limited companies are from the sale of shares and the
issuing of loan certificates (debentures) while the sources of finance for public corporations are from the
government from taxes and other sources of government revenue.
(vi) Distribution of Profit: Profits made by public limited companies are distributed to shareholders depending
on the percentage of shares held by the shareholders while profits (surpluses) made by public corporations
are transferred to the government treasury to be used to achieve other objectives of the government.
(vii) Risk Bearing: Risks incurred in public limited companies are borne by shareholders and is limited to the
amount invested in the business because they have limited liabilities. Whereas risk bearing of Public
Enterprises are the taxpayers who will finance any losses realised
Note: Candidates are advised not to tabulate answers for these types of questions. They are advised to make
good use of conjunctions.