How to choose the right structure for your business
When starting their business, a lot of people are driven by one overriding factor – keeping the costs as low as possible! while that is a good thing, there is such a thing as being penny wise and pound foolish. As an entrepreneur you need to ensure that whatever business structure you decide to set up reflects the nature of your business and the inherent risks.
Most people gravitate towards registering a business name (and not incorporating a company) when they start off solely because it’s cheaper. Now don’t get us wrong we are not saying there is anything bad in registering a business name, not at all, what we are saying is that a registered business name is more suited to some businesses than others.
For instance, let’s look at the hypothetical case of Taju, Taju imports goods into Nigeria and then sells them in his shop at Alaba in Lagos. Taju’s business model means that he borrows money to import the goods (whether from banks or from his investors/friends).
This business model has high risk, and therefore the better structure to have would be an incorporated company, because in an incorporated company the risk would normally be borne by the company and not personally by Taju.
However, if Taju decided to register a business name when he originally set up his business, and the goods were destroyed while being imported (and Taju didn’t insure the goods), he would be personally liable to pay for the loans he obtained, even though he never received the goods. Personal liability would mean his creditor(s) could get a court order for the repayment of the debts through the sale of his personal assets (his house, his car etc.).
Now if Taju had incorporated a company, and the company obtained the loans, it is the company that would be on the hook if the goods were destroyed, and the creditors would not be able to come after Taju’s personal assets, but only the assets of the business.
We decided to come up with a brief list of differences between a limited liability company and a registered business name:
Now if you as an entrepreneur are thinking, but I am not an importer, so this doesn’t apply to me, then you have missed the point this article is trying to make. The point is that every business has its inherent risk and you should think about this when deciding on the type of business structure to adopt when setting up.
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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. It is not intended to substitute for the advice of a qualified lawyer. If you require legal advice, please consult with a qualified lawyer.