, How are you doing today?

In today's newsletter, I am going to share some thoughts with you on Shareholders' Liability.

One question that I get asked most of the time by my clients who want to register a limited liability Company is whether they can be liable for the debts of the company should something go wrong.

The issue of liability is a major concern for many startups, especially for businesses with Co-founders and with little or no legal structure.

I usually advise my clients that beyond incorporating a Ltd Liability Company, there is a need to further execute a Partnership or Co-founders Agreement as the case may be.

This is important to mitigate the incidents of shareholders and other co-founders absconding at the first sign of trouble usually leaving the main owner of the business to bear his cross alone.

So, apart from the memorandum and article of association of the company which the CAC gives, there is a further document that binds everyone.

 That way you can be sure that no shareholder or director will abscond at the first sign of trouble.

By the way, a shareholder is a person who has at least one unit of shares in a company whether or not he is a director of the company as well.

What that means is that a person may be a director and also have shares in the company and that makes him both a director and a shareholder in the company.

On the other hand, a shareholder is not necessarily a director, especially where there are more than two (2) directors. In this case, he is just a shareholder and not a director.

Likewise, a director may not necessarily have shares in the company, especially where there are two or more other directors who already have shares.

So, he is just a director in the company with no shares and that’s totally fine.

So back to the liability of a shareholder in a company.

1. A shareholder is liable to the company for any unpaid amount on the shares held by him.

For example, if Mr. A is a shareholder in  Bari Ltd, holds 500,000 units of shares in the Company, and the shares are probably currently issued at N2.00 per unit, then A will be liable to the company for one million naira (as in 500k*2 = 1M).

If however, A  had paid 50% of his shares before now, then he would only be liable to pay the remaining balance of 50%.

2. Shareholders are personally not liable for the debts of the company; their liability is limited to the number of shares held by them.

What that means is that you can’t come after the personal properties of the shareholders such as houses, cars, Lands, etc. unless of course there is an allegation of fraud.

Creditors of the Company would have to go after the assets of the company in order to get their money back.

The question then is, why should you give your money to a company that has no assets without due diligence?

Let me shake this table a little…

A very good number of online and offline entrepreneurs have no physical assets that you can come after for the satisfaction of your debt.

You will have to come after our courses, ebooks, Podcasts, etc to recover your money or investment lol

That’s on a lighter mode.

But seriously, it's worth giving it a thought before you enter into major transactions with no-asset companies.

Reply to this email and tell us what legal help you need in your business.