Legal Considerations for Nigerian Business Start-Ups – Part 1: Business Forms

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Source: Adobe Spark

It is the start of a new year – what better time is there to start taking steps towards achieving one’s goal/objective/resolution to start a business, than the present?!

The state of the Nigerian economy and the unemployment rate in Nigeria (amongst other factors) have inspired young Nigerians to think outside the box- the possibility of having a means of livelihood that is not wholly-dependent on a nine-to-five job. While people may be aware of the nature of the business they would like to start, not all may be properly informed about the form of business to use. By “form of business“, I mean the structure or vehicle to use to bring the business into existence. Throughout this article, I will use the phrase “business aspirant” to refer to a person or people who would like to start a business.

This is the first in a three-part series, aimed to serve as a basic legal guide to starting a business in Nigeria. This part provides an overview of the forms of business that are legally available and registrable, the second deals with the financing options to consider for the new business, while the final part discusses the most challenging form of financing (debt finance).

Registrable business forms

Generally, there are two (2) forms of business that can be registered in Nigeria:

  1. Companies; and
  2. Business Names.

At this point, it is worth noting that it is legally possible for a business aspirant to start a business without the need to register it in Nigeria. In the context of this article, registration is a reference to registering the business with the Corporate Affairs Commission (CAC) in Nigeria. People choose to register their business at CAC for various reasons e.g. to take advantage of a government policy initiative available to only certain types of registered businesses, for financial accounting reasons, tax breaks/benefits, completeness and good order, etc. So, although it may seem reasonable to register a business because it is a common practice, this may not be necessary and it is also not compulsory for all business ventures.

A company is the most popular business form in Nigeria, which is likely the reason why most business aspirants in Nigeria choose to register a company automatically, not necessarily being aware of the other business form – business names. A company needs to be formed by at least two (2) people. It can be used as the vehicle for carrying out any type of business venture. Identifying a company is very easy – the name usually ends with “Limited”, “Unlimited”, “Ltd”, “Ultd”, “Plc”, etc. Nigerian law requires that a company’s name must end with at least one of these. These identifiers are an indication of the nature of the liability assumed by the owners of the company (discussed below) as well as the nature of the company in terms of whether it is a private or public company. In Nigeria, it is quite common to see businesses that are not even registered using one of these identifiers, which could be misleading as to the business’ status.

The second business form is called a “business name“. This can be used for a wide array of business ventures, but it is not suitable for all types. In addition, the type of business that one can conduct with this business form can be somewhat limited/restrictive, compared to a company. A business name is the form commonly used for sole proprietorships (one-man businesses) and partnerships. It is basically like a trade name and is very suitable for most start-ups. It is possible for a business aspirant to start a business venture using a business name, which could subsequently be upgraded to a company, depending on business needs and circumstances. Unlike companies, business names do not have pre-defined identifiers. It suffices to say that a business name does not end with “Ltd”, “Limited”, “Plc”, etc. Common business names in Nigeria end with “and Co”, “Enterprises”, “and Partners”, etc. but there is no law that makes it compulsory for a business name to end with a particular word or abbreviation.

Legal factors to consider when choosing a business form

In deciding whether or not to form a registered business as a company or a business name, there are certain factors to consider – these can be categorised as economic factors (supply and demand, competition, etc.), commercial factors (amount of capital available, source of funds/financing, type of business, etc.) and legal factors. This article only provides an overview of some of the key legal factors, as there are numerous materials available that already deal with the other two factors  e.g. see here and here, etc.

1. Number of investors/proprietors:

If a business aspirant intends to start off as a sole entrepreneur i.e. one-man business, the default business form is a business name. This is because the law requires at least two (2) people to join in the formation of a company. Some people get around the requirement for two (2) people by getting a family member or friend to be the second person on paper – the main issue with this is getting this extra person out of the picture if/when the business becomes profitable and real commercial investors are interested in taking the business further, but such extra person decides that they want to remain in the business (for obvious reasons). Some people have struggled to get the extra person out because (s)he does not want to be left out of profits, which then leads to further complications.

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Source: Adobe Spark

Where two (2) or more people would like to start a business venture, they can choose to set it up as a company, or a business name. Generally, a business name can be made up of up to twenty (20) people (there are some exceptions, e.g. for law firms set up as business names). Where the proprietors are more than twenty (20), the law requires that the business name be wound-up and registered as a company.

2. Nature of the business venture:

If the business venture is a simple start-up, a business name may be suitable. For example, accountancy firm, law firm, catering, advertising, trading or fashion businesses, etc., are very suitable to start as business names. On the other hand, where the business is likely to be more than simple, e.g. importation, exportation, real estate development, financial services, etc., a company is not only more suitable, it is also almost a necessity because of the benefits that setting up a company offers, as well as the nature of the discrete activities involved in running such businesses – there is also the possibility that the law dictates what form of business must be set up for certain types of business activities. For example, by law, you cannot set up a bank or bureau-de-change as a business name – the law requires such to be set up as a company. Also, if the business aspirant intends to bid for contracts (public or private procurement), a company would be required.

As a general rule, any business venture that can take the form of a business name can also be set up as a company – provided that there are at least two (2) people involved (on paper at least) – but the reverse is not necessarily the case. At the risk of repetition, it should also be noted that, where two (2) or more people would like to go into a business together and they decide to form a partnership, such partnership on its own can stand without the need for it to be registered as a business name. As such, the relationship could have certain aspects that make it resemble a company but unless it is registered as such with CAC, it remains what it is – a mere partnership, nothing more.

3. Liability:

Where a business venture takes the form of a business name, the owner(s) of the business will always be personally liable for the business. In other words, the business and the owner(s) are treated as “one and the same”. Therefore, if for example, money is borrowed to run the business, the owner(s) may have to pay from their own pockets if the business is unable to do so. The simplest reason for this is that as a general rule, a business name does not have “legal personality” i.e. it is not recognised as a “person” under the law – therefore, it cannot own anything, enter into contracts, etc., in its name (unless a specific statute / law expressly confers such legal personality on business names for specified purposes). Its owner(s) can do such things “for” the business name, but the burden of the liabilities remains with them. Put differently, the owner(s) of a business name are in business on their own and personal accord, but acting under the cover/through a business name for whatever reason.

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Source: Adobe Spark

If the business is set up as a company, however, the owners (called shareholders or members) can generally be protected from personal liability, unless there are circumstances making them personally liable. This is achieved by registering the company as a “limited liability company”- this is the significance of the identifiers discussed above. A company whose name ends with “Limited” or “Ltd” indicates that the liability of the members of the company is limited to their capital contribution [to the extent fully paid-up]. Therefore, if, for example, X invests N1 million in the company by way of share capital, in the event that the company goes bust and cannot pay its debts, provided that X actually paid the full N1 million into the company, X is not liable to pay anything extra to the creditors of the company (unless X had separately guaranteed the company’s debts by some other contract – this is beyond the scope of this post, but will be discussed separately in a future post). If, on the other hand, X only paid N600,000 for the shares, leaving an outstanding balance of N400,000, then X would be liable to pay up the N400,000 to the company only, in order to fully pay up the shares apparently held by X in the capital of the company. Conversely, a company that is “Unlimited” or “Ultd” has the liability of its members unlimited – they would therefore be liable to the extent that the company is unable to satisfy its debts.

Unlike a business name, a company that is registered has “legal personality” – therefore, under the law, it exists as a person and is able to do most things that adult human beings (natural persons) are able to do under the law. It means that the company is also generally liable and responsible for whatever it does – not its members (unless there are circumstances that require the members of the company to be held responsible, which is very rare).

Whereas the owner(s) of a business name would be personally responsible for the acts, omissions, management, etc. of a business name, in a company, the company acts through decisions of the management (comprised by the board of directors) and the shareholders (in certain circumstances), by way of resolutions. In certain circumstances, the members of the board of directors may be held directly responsible for the company’s acts (e.g. for certain crimes), whereas in other circumstances, the company (in its own name and right) would be held directly responsible for its acts e.g. breach of contract.

Part two of the series will shed more light on the choice between limited/unlimited and private/public companies in the context of equity finance.

4. Initial and ongoing statutory costs and responsibilities:

Registering a business name is cheaper than registering a company. The statutory fees for setting up a business name is about one-third of the least amount that it would cost to register a company. In this context, the reference to “statutory fees” is a reference to the fees that are payable to the relevant government agencies such as CAC and the Federal Inland Revenue Services (FIRS) – it does not include what the professional (lawyer or chartered accountant or secretary) may charge you for their services if engaged to assist with the process.

After registration, the business may be required to pay taxes (federal and/or state taxes) – depending on its revenue. Generally, business names have lesser tax burdens than companies. There are also filings that are required to be made to CAC post-registration on an ongoing basis and these are not necessarily cheap. Administrative burdens also exist – for example, companies are required to have general meetings annually (annual general meetings), but this is not required of business names.

In addition, every company is required to have directors and a company secretary, appointed as officers for the day-to-day management of the company. These roles can be filled by the shareholders of the company i.e. a business aspirant can be a shareholder, director and company secretary at the same time. A lot of people take these roles for granted, not understanding the legal responsibilities placed on company officers (and the ensuing consequences of breach) – for example, a failure by the company to do something may lead to a criminal offence being committed by the directors. Also, the secretary is usually responsible for ensuring that the company complies with its regulatory requirements e.g. CAC filings, keeping records of certain documentation, etc. and the company secretary is expected to know what these duties are, regardless of the absence of legal training or education.

With business names, however, the regulatory burden is generally much lighter and the ongoing responsibilities are very few and limited – there are also no requirements for the appointment of directors/managers, secretaries or any sort of formal “officers” of the business.

Conclusion

It is important for every business aspirant to understand the business forms available in order to set up a vehicle that is tailored to his/her business needs and purposes. Besides the commercial and economic factors to consider before setting up a business, an appreciation of some key legal factors would also guide such aspirant in making the right decision. Although a company is common and technically offers a “one-size-fits-all” vehicle on the surface, it may not necessarily be the best start-up vehicle.

CAC logo

Source: Nigeria Politics Online

More information on the registrable business forms in Nigeria can be found on the CAC’s website, including information on the process and costs of registering the business types. Readers would be pleased to know that you do not necessarily need to engage the services of a lawyer or chartered account/secretary or other professional for the purposes of registering a business in Nigeria (and online registration is possible). However, their knowledge of the quirks of the system, familiarity with process and a network of colleagues at the government agencies that may be relevant (e.g. CAC and FIRS) should not be underestimated.

Having considered the factors discussed above, a business aspirant would be faced with the decision of how to raise the funds for the new start-up and this could also have an impact on the form of business so chosen. This would be addressed in the second part of this series, where the three main financing options would be briefly discussed; these are personal financing, equity financing and debt financing. These principles apply across the board, regardless of whether the business aspirant desires to have a registered business form or a business that is not registered.

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2 comments

  1. Marilyn Okowa-Daramola

    Excellent article!!!!! Well done Mavii

    Like

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