It takes a lot of work to start a business and although the quantity of paperwork, legal regulations, and strategic planning for your business may seem overwhelming, they are all important for its success.
Though it may seem like a hassle, deciding what type of entity your business should be, is one of the most important steps for your company. The chosen business structure has an impact on daily operations, taxes, and personal liabilities. The optimum business structure should provide the appropriate balance of legal protections and benefits. The structure may also have an impact on how well your business can generate money and may reduce tax burdens. It is important to carefully consider your options and make an informed decision at the outset in order to prevent unnecessary future conversions.
Businesses are started for a variety of reasons, such as to provide a good or service or for charity. Choosing the proper structure is one of the first important decisions business owners will need to make when starting their business in Nigeria, regardless of the reason a company exists. This article briefly covers some of the available structures and offers some factors to be considered in making a choice. Despite the valuable information covered in this article, it is still important to consult a lawyer or tax professional about what is needed for your unique situation.
Types of Business Structures in Nigeria
The Companies and Allied Matters Act 2020 (CAMA), which governs business structures in Nigeria, provides a number of business structures that can be selected and registered with the Corporate Affairs Commission (CAC). One or more of the structures listed below may be suitable for you, depending on the nature of the company and its long-term objectives.
In Nigeria, companies are divided into 4 different types, they are:
A. Private Limited Company by Shares: The liabiilty of its members is limited to any amount unpaid on the shares held by the shareholders. This is the most common structure and it is mainly adopted by small companies that have a view to expand in the future.
Some key features of a private company limited by shares are:
i. Only one person can incorporate a private company.
ii. Transfer of the shares of a private limited company must be restricted in its Articles of Association
iii. It does not make its shares available to the general public.
iv. The word “Limited” or “Ltd.” must be at the end of the company name.
B. Public company limited by shares: A public company is any company other than a private company. The liability of members is limited by shares, which means that their liability is limited to the amount of of unpaid shares owned by them. This company is usually the preferred choice for large businesses with huge capital and who may wish to regularly raise large capital.
Some of its distinguishing factors include:
i. It can invite the members of the public to subscribe to its shares
ii. There is no maximum number of members, however, there must be a minimum of 2.
iii. It must be specified in its Memorandum of Association that it is a public corporation.
iv. The transfer of shares held by members is not prohibited by the Articles of Association.
v. ‘Plc’ must be at the end of the company name.
C. Company limited by guarantee: A company limited by guarantee is a type of company in which the liability of its members is limited to the amount guaranteed to be contributed in the event of winding up or insolvency. In other words, the members of the company are only responsible for the debts of the company to the extent of the amount they have undertaken to contribute. This company type is mostly used by non-profit organisations such as clubs, sports associations, non-governmental organisations (NGOs), charitable organisations, among others.
The key features of this type of company are as follows:
i. It does not have share capital or shareholders. Its members are guarantors.
ii. The members of the company undertake to contribute a nominal amount which must be at least #10,000 in the event of the winding up or insolvency of the company.
iii. It engage in business but the profit of the business cannot be distributed to its members, it can only be used for the promotion of its objects.
iv. The consent of the Attorney General is required for the incorporation of a company limited by guarantee.
v. “Ltd/Gte” or “Limited by Guarantee” must be at the end of the company name.
D. Unlimited Liability Companies: For this type of company, there is no limit to the financial liability of its members. Its members are generally liable for the debts and liabilities accrued by the company.
Some key characteristics are:
i. Members personal assets may be liquidated to settle debts of the company where the company’s liabilities exceed its assets.
ii. The name of the company must end with ‘Unlimited’ or ‘UNLTD’
2. Business Names: In addition to registering your company, you can also choose to register your business as a business name with the Corporate Affairs Commission in Nigeria (CAC). In Nigeria, sole proprietorships and partnerships may be registered as business names.
3. Partnership: A partnership is a business formed by two or more persons who share the ownership, profits and losses accruing to the business. However, in some forms of partnerships, some partners have restricted liability. In a partnership, all partners share liabilities and earnings equally. A partnership business is not financially separate from the partners. General partnerships, limited partnerships, and limited liability partnerships are the three types of partnerships recognised by Nigerian law.
Features of a partnership
i. A partnership is formed with the intention of making profit.
ii. In a partnership, each partner bears a portion of the partnership’s risks as well as its gains and losses.
iii. The assets of the firm are owned jointly by the partners. When a partnership dissolves, its assets are allocated to all of the members in line with the Partnership Agreement.
iv. A partnership can have up to 20 partners, but if it is a cooperative organisation or a partnership with the aim of carrying out the practice of legal practitioners or accountants, the number of partners may be higher.
v. The partners are in control and make all decisions.
4. Sole proprietorship: This is the most basic structure that a business can take. The owner is not legally or financially independent from the company because it is not a legal entity like a company. One person owns the company; she also controls it, manages it, assumes all of its risks, and is is entitled to all of its profits and losses.
Features of a sole proprietorship:
i. It does not have separate legal personality. The owner and the business are the same financially and in the eyes of the law, so it cannot sue and be sued in its registered name.
ii. It is owned and managed by one person who makes all the decisions for the business. The owner has complete control of the business.
iii. The liability of the owner is unlimited. So, if the business is unable to pay its debt or liabilities, the owner will be personally liable for all the debts.
iv. The owner bears all the risk and enjoys all the profit.
v. The death, imprisonment or bankruptcy of the owner will affect the continuity of the business, that is, it may cease to exist.
5. Incorporated Trustees: An individual or group of persons (referred to as trustees) who are connected by tradition and religion might be incorporated as Incorporated Trustees. They are typically associations founded for charitable, social, cultural, educational, sports, or developmental goals. Mosques, churches, clubs, NGOs, etc. frequently register as incorporated trustees.
Features of incorporated trustees:
i. It is formed by just one more person.
ii. It does not do business and it does not distribute profits. The profits must be applied only for the promotion of its objects.
iii. The members do not have separate legal personality but the trustees do.
iv. The name must begin with the words “Incorporated Trustees Of”
With the long-term goals of the business in mind, consider the upsides and downsides of each legal structure to determine which one is the most appropriate for your company now and in the future. Some factors to keep in mind when choosing a structure are the amount of liability you wish to bear, the way you would prefer to raise capital, how much control you want over your business, the cost of registration and set up, among others. It is also important to contact experienced legal professionals or tax specialists in order to make the best choice.
Written by Nero Ewherido
Nero Ewherido is a Junior Associate with Marcus-Okoko & Co., and specializes in Tech Advisory, Corporate Law, and Regulatory Compliance