So you have come up with a great business idea, and you are itching to launch and make loads of money in Nigeria. You might think, to start with you do want to keep your startup costs low, and one of the ways you wish to do that is by registering a business name, and not going down the route of company incorporation. While on paper this might sound like a good strategy, in reality it might not be so wise.
Here are 7 reasons why registering a Company incorporation in Nigeria is a smarter legal and business decision than registering a Business Name.
The first and most important reason why people incorporate is for something called corporate personality. Under Nigerian law (and the laws of almost every country in the world), there is a legal fiction where a company is deemed to be a separate legal entity from the individual(s) who created/run it. Therefore the company has powers to enter into contracts, buy property, own property etc.
The legal implication of this is if the company for instance owes a bank N10 million, it is the company that owes the bank and not the Directors, and the bank cannot then sue the Directors in their personal capacities in order to recover the debt (unless the Director(s) gave personal guarantees for the loan).
If you have a registered business name, there is no room so such ‘legal gymnastics’. The person who owns the company is one and the same as the company, and therefore if you borrow money from a bank, you are personally liable. Irrespective of the fact that you might have spent the entire money on the business, you are still personally liable.
Starting a new business in Nigeria is in most cases a risky venture, you put in your personal savings (and maybe borrow from your close friends and family) and in some instances you give up a secure and probably lucrative job. You need to be rest assured that your risk is limited to what you have already put in to start the business if the business fails. This way you are able to protect your property and personal assets from being used to pay the business debts. Without incorporating a company, the ultimate risk if your business fails, is personal bankruptcy.
Under Nigerian Tax Law, registered businesses do not pay companies tax, they pay Personal Income Tax. The implication of this in a Federal State like Nigeria is that if you have a Director of a company, you pay your company income tax to the Federal Inland Revenue Service (FIRS), and you pay your personal income tax to the relevant State Inland Revenue Service (in Lagos this is the LIRS).
If you are the sole proprietor of a registered business, you will only pay personal income tax to the relevant State Inland Revenue Service. Now, while on the face of it, dealing with two different tax bodies might seem tedious, there are inherent benefits to it. However, you have to plan your taxes very well, by consulting with a tax accountant or tax lawyer.
For instance, in an incorporated company the shareholder director will receive a salary that is subject to personal income tax at one rate, and then dividends that is taxable at another rate. What a savvy person will do therefore is elect to receive the most tax efficient mix of salary and dividends.
It is also worth noting that most benefits and expenses are taxable, however in a registered company in Nigeria, you could legally offset certain costs that would have been taxable as benefits in kind under personal income tax. You should always take professional tax or financial advice based on your specific circumstances. Please note that no tax advice is offered in this article.
Professionalism and Competitiveness
Electing to register a company rather than register a business name, projects a much more professional image. It signals that you are focused on the business and also committed to abiding by professional corporate governance structures, which the regulatory body in Nigeria (Corporate Affairs Commission) has created.
It suggests to the world that the business has permanence and is committed to effective and responsible management. It also instills a sense of confidence in customers and suppliers. On the other hand (and this is by no means a slight to registered business names), because of the low barrier to entry in order to operate as a business name in Nigeria, customers and suppliers are less likely to want to transact with such businesses, and therefore makes it an uneven playing field when competing with registered companies.
Also, in Nigeria certain Government departments and agencies, and multinational companies have rules that in order to tender for work or provide services to them, you would have to be a registered company. Therefore not incorporating could potentially hinder the growth of your business.
As discussed above, a registered company has its own legal identity, therefore when third parties contract with the ‘company’, they do so with a separate legal entity and not the individual directors and shareholders. This means that companies survive the death or incapacitation of the owners and it’s possible for the directors and shareholders involved with the company to change over time.
For those familiar with the concept of risk management, one of the key things in understanding the risk profile of a business is business continuity. If Mr. A, who owns the business, was to get hit by a bus, or get arrested the next week, what would happen to the business? This is important not inly from a day-to-day running of the business perspective, but also from a legal perspective. Who signs the cheques when he is not available? As the business is classified as a personal one, upon his death, it gets lumped into his estate and is subject to estate and probate laws etc.
Suffice to say that business continuity in a registered business is very risk-prone and therefore third parties are wary about over-commitment to such businesses. Apart from third parties, this is also important to employees, people are wary about working with a registered business because it is essentially a one-man show that can end abruptly and with little or no safety net for the employees.
However, if it is a registered company, its existence will only cease if it is formally wound up, liquidated or by other order of the Nigerian courts or Registrar of Companies. Amongst other benefits, this can provide more perceived security for employees and third parties than other business structures.
In very general, and oversimplified terms, there are two broad ways to raise funding – debt and equity. Debt is basically, give me X for my business and I will pay you back at a future date with X% interest; equity is give me X for my business and I will give you X number of shares in the business as well.
For debt, both business structures – registered business and registered company, can raise funding this way, however in the case of a registered business name, the proprietors are responsible personally for the debt until it is discharged, but for the registered company, as discussed earlier the company is the debtor and not the shareholders so they are in a sense more insulated.
For equity, registered businesses generally have to raise new capital from their own resources or from family and friends. However, registered companies that are incorporated are able to raise capital at any time by issuing new shares. The new shares can be offered to existing shareholders or new investors, although only public limited companies can offer shares to the public. This is why incorporation is a good option.
Remuneration for Employees
This is more relevant for technology companies, where to commence operations you need highly skilled and in-demand workers. As most incorporated companies commence operations with limited funding, it is difficult to be able to hire the required employees easily at the beginning. The way this has been tackled is to offer ownership of the company to early stage employees by way of equity, the employees accept little or no pay secure in the knowledge that they have some ownership in the company that is being built, and their payday is when the company starts to become successful.
However, because a registered business does not have shares and cannot share equity, this path is closed for them and therefore it is more difficult to offer varied remuneration structures to employees.
7. Future Exit
If you have a registered business, upon retirement, it is very likely that the business will retire with you. However, registering a business as a limited company can aid the possibility of selling it in the future. The original shareholder/owner of the company will be able to achieve a completely clean break and get a pay out for the business.
If you require support in registering your startup as a limited liability company, please find out more about how we can assist by clicking the button belowCompany Registration FAQ
We hope you have found this information helpful. Please note that this information is provided for general informational purposes only and is not intended to be legal advice. No lawyer-client relationship is formed nor should any such relationship be implied. If you require legal advice, please consult with a qualified lawyer.