Section 389 of the companies Act provides that “no company, association or partnerships consisting of more than 20 persons shall be formed unless it is registered as a company under this Act”.

There are three types of companies provided for under this section: -
(i)                 Chartered companies
(ii)               Statutory companies
(iii)             Registered companies

(i)                 Chartered companies

The crown in the exercise of the royal prerogative has power to create a corporation by the grant of a charter to the person assenting to be incorporated.  No such companies can be formed in Kenya after independence and section 389 only serve as a reminder of English origin of our companies Act.

(ii)               Statutory companies

A company may be incorporated by means of a special Act of parliament. A statutory company has no shareholders and its initial capital is provided by the treasury.  It is expected to operate according to commercial principles and to make profit.  If it makes losses and becomes unable to pay its debts, its property can be attached by its creditors but it cannot be wound up on application of any creditor.  However, the government will come to its aid if it has no cash or other assets to pay its creditors.  Examples include- Kengen, KP&L.Co, Kenya Pipeline, Kenya Railways, KTDA, KVDA etc.

(iii)             Registered companies

A registered company is formed by registration under the Companies Act. Section 2 of the Companies Act defines a company as “a company formed and registered under this Act.”

Classification of registered companies section 4(I) classifies registered companies into:-
(a)    Public company – A company formed by any seven or more persons.
(b)    Private company – A company formed by any two or more persons.

A private company or a public company may be:-
(i)                 Limited by shares – if the liability or its members is limited by its memorandum to the amount if any unpaid on the shares held by them.

(ii)               Limited by guarantee -- if the liability of its members is limited by its memorandum to an amount which the members have undertaken to contribute to the assets of the company in the event of its being wound up.

(iii)             Unlimited -- if it does not have any limit on the liability of its members.


Private Company

According to section 30(1) of the Act, a private company means a company which by its articles:-
(a)    Restricts the right to transfer its shares.
(b)    Limits the number of its members to fifty not including persons who are in employment of the company.
(c)    Prohibits any invitation to the public to subscribe for any shares or debentures of the company.

Section 30(2) provides that where two or more persons hold one or more shares in a company jointly, they shall, for the purpose of this section, be treated as a single member.

Section 31 provides that if a private company fails to comply with any of the restrictions in the articles, it ceases to be entitled to any privilege or exemption confessed on private companies and thereupon the provisions of this Act shall apply as if it were not a private company.

Privileges of a Private Company

Certain provisions of the Companies Act do not apply to a private company but are applicable to public companies.  These may be regarded as the privileges or advantages of a private company, which are as under:-

(i)          A private company may consist of only 2 members.
(ii)       A private company is entitled to commence business immediately on incorporation.
(iii)     A private company may allot shares without issuing a prospectus or delivering to a     registrar a statement in lieu of prospectus (Section 30 (1).
(vi)     A private company is not required to hold a statutory meeting or file a statutory report with the registrar.
(v)        A private company need not have more than two directors.
(vi)       Copies of balance sheet and profit and loss account filed with the registrar cannot be inspected by the public.
(vii)      A director of a private company need not hold the share qualification.
(viii)     Restrictions in regard to overall remuneration do not apply to a private company.

Public Company

This is a company which is not a private company.  There must be at least seven persons to form a public company.  There is no restriction as to transfer of shares.  The articles of a public company may however contain restrictions on the issue and transfer of shares.

Distinction between a Public company and a Private company
1.         Minimum number of members:- For public company is seven whereas private company is two.
2.         Maximum number of members:-
There is no limit on the maximum number in case of public company, but a private company cannot have more than fifty members.
3.         Commencement of business:-
A private company can commence business as soon as it is incorporated, whereas a public company shall not commence its business immediately unless it has been granted the certificate of commencement of business.
4.         Invitation to public:-
A public company by issuing a prospectus may invite public to subscribe to its shares whereas a private company cannot extend such invitation to the public.
5.         Transferability of shares:-
There is no restriction on the transfer of shares incase of a public company whereas private company by its articles must restrict the right of members of transferring the shares.
6.         Number of directors:-
A public company must have at least three directors whereas private company may           have two directors.
 7.   Statutory meeting:-
A public company must hold a statutory meeting and file with the registrar a statutory report, but in case of a private company there are no such obligations.
   8.     Name:-
The name of a private company must include the words “private ltd” at the end of its name, but a public company has to use the words “ltd” at the end of its name.

One Man Companies

These are the companies in which one man holds virtually the whole of the share capital with a few extra members holding the remainder who may be his relatives or nominees.  Being the largest shareholder such a person is generally the sole or the managing director and enjoys complete control over the company.  This is done to fulfill the statutory requirements and such type of companies are perfectly valid and not illegal as established by leading case of Saloman vs. Saloman & Co. Ltd.


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