Nature and Classification of Companies
Formation
Nature and Classification of Companies
Syllabus tag: KASNEB CPA | Intermediate Level | CA21 Company Law | Topic 1 Nature and Classification of Companies
Lesson objectives
By the end of this topic, you will be able to:
- Explain separate legal personality and its consequences
- State when the corporate veil may be lifted
- Classify companies by liability, by membership and by control
- Distinguish a private from a public company
- Compare a company with a partnership and a sole trader
Why this matters
Almost every rule in company law follows from one idea: the company is a person distinct from the people who own it. Understanding what that produces — and where the law refuses to allow it — is the foundation of the paper.
Separate legal personality
On incorporation the company becomes a body corporate distinct from its members, established in Salomon v Salomon & Co Ltd and given statutory force by the Companies Act 2015.
The consequences follow directly:
- The company can own property in its own name; members own shares, not the assets
- It can contract, sue and be sued in its own name
- It has perpetual succession — it survives the death of every member
- Members enjoy limited liability, owing only any amount unpaid on their shares
- The company is taxed as a person in its own right
A member who is also the sole director and effectively the whole business is still a separate person in law. That was the point disputed and settled in Salomon, and it remains the starting point.
Lifting the corporate veil
The veil is lifted where the courts or statute look past the company to the people behind it. This is exceptional, not routine.
By statute:
- Fraudulent trading — carrying on business with intent to defraud creditors
- Wrongful trading — continuing to trade when insolvency was inevitable
- Acting while disqualified, which brings personal liability for relevant debts
- Failure to comply with certain disclosure requirements
By the courts:
- Where the company is a sham or facade concealing the true position
- Where it is used to evade an existing legal obligation
- In some group situations, where the subsidiary is a mere agent
The distinction the courts draw is between using a company to evade an obligation that already exists — impermissible — and arranging future affairs through a company to limit liability, which is the whole point of incorporation and entirely lawful.
:::checkpoint A trader bound by a covenant not to compete forms a company and competes through it. Explain whether the veil would be lifted, and contrast this with a trader who incorporates before entering the market at all. :::
Classification by liability
| Type | Member liability |
|---|---|
| Limited by shares | Any amount unpaid on the shares held |
| Limited by guarantee | The amount guaranteed on winding up |
| Unlimited | Unlimited, but only on winding up |
Companies limited by guarantee have no share capital and suit clubs, professional bodies and charities, where members contribute a nominal amount if the company is wound up.
Private and public companies
| Private | Public | |
|---|---|---|
| Members | One or more | Two or more |
| Directors | At least one | At least two |
| Offer shares to the public | Prohibited | Permitted |
| Company secretary | Only if paid-up capital is KES 5 million or more | Mandatory |
| Share transfer | May be restricted by the articles | Freely transferable |
| Name ends with | "Limited" | "Public Limited Company" |
The prohibition on offering shares to the public is the defining restriction on a private company. In exchange it faces lighter disclosure and governance requirements.
Other classifications
Holding and subsidiary. A company is a holding company where it controls the composition of the other's board, holds more than half the voting power, or holds more than half the issued share capital. Note that control of the board is sufficient on its own — a company can be a holding company without majority ownership.
Small company. Qualifies for reduced reporting and possible audit exemption where it meets the statutory thresholds.
Foreign company. Incorporated outside Kenya but carrying on business here; must register with the Registrar and file prescribed particulars.
Company, partnership and sole trader
| Sole trader | Partnership | Company | |
|---|---|---|---|
| Separate legal person | No | No (unless an LLP) | Yes |
| Liability | Unlimited | Unlimited, joint and several | Limited |
| Continuity | Ends with the owner | Disturbed by a partner leaving | Perpetual |
| Formation cost | Minimal | Low | Higher |
| Disclosure | None | Little | Extensive |
| Taxation | Personal rates | Partners taxed individually | Corporation tax |
The trade-off is consistent: limited liability and perpetual succession are bought with disclosure and formality. A business that wants the protection must accept publicity about its affairs, and one that wants privacy must accept personal exposure.
:::checkpoint Two partners in a growing consultancy are considering incorporating. Set out the two most significant advantages they would gain and the two most significant obligations they would take on. :::