There is a growing understanding by Nigerians of the importance and advantages of registering their businesses. This is evident in the number of new businesses that have been springing up.
In choosing the right business structure, it is important to understand the various forms and structures available and how suitable each can be to a business. A lot of things determine the suitability of a particular company structure or form for a business. Some of these are the size of the proposed business in terms of membership, the liability of members, the objects for which the business is intended to achieve, whether the business intends to raise money from the public and whether it wants to be able to give dividends etc.
Individuals or businesses seeking to register corporate organizations in Nigeria may incorporate the same as either a private company limited by shares or a public company limited by shares. A private company limited by shares or a public company limited by shares is suitable when the aim is to incorporate a company to make profits, but a private company limited by shares is, however, highly recommended for start-up companies for several factors which include the fact that a single person may form and incorporate it and its process for registration is not as strenuous as other forms of incorporations
TYPES OF BUSINESS STRUCTURES
The Companies and Allied Matters Act, 2020, (CAMA) is the primary legislation that governs business structures in Nigeria. Below are different business structures in Nigeria:
- Sole Proprietorship: This is the most popular and widely adopted form of business structure in Nigeria. It is the simplest of all the business structures. A Sole Proprietor manages and operates his/her business as a business name. Even with the registration of this business name, a Sole proprietor can sue and will be sued in his own name. The business does not have a separate identity different from that of its owner. The Sole Proprietor controls the entire activities of the business and is responsible for the debts of the business. The structure is not expensive and very easy to set up. This business structure is suitable for traders, home businesses and most small businesses.
- Partnership: This is an association of two or more persons who carry on business under a partnership to make profit. In partnership, the partners are jointly and severally responsible for the debts of the business. It is advisable to be careful about who you enter into a partnership with, as all partners are equally liable for the actions of the other partners. This means one partner can be held liable for the negligence, action or inaction of the other partner, it is wise for every partnership to have a partnership agreement to clearly state out the rules in the partnership.
- Limited Liability Partnership: Part C, Sections 746-788 of CAMA, 2020 introduces Limited Liability Partnership. For persons intending to engage in a partnership, the introduction of this type of business arrangement allows such partnerships to also be regarded as separate legal entity. Accordingly, upon registration, it can sue and be sued in its name, acquire, own, hold, develop and dispose-off immovable or movable property, have a common seal (optional) and perform any other acts a body corporate may lawfully engage in. Section 788 of CAMA, 2020 further recognizes the operation of a foreign limited liability partnership, which must be registered in Nigeria if it intends to carry on business in Nigeria. However, the Minister has the power to grant an exemption from the requirement to register.
- Limited Partnership: Part D, Section 795 of CAMA 2020 recognizes a limited partnership to be one consisting of one or more general partners who are liable for the debts and obligations of the firm and limited partners. Therefore, while the liability of the general partners is unlimited, that of the limited partners is limited to the amount they contributed or agreed to contribute.
- Incorporated Trustees: Incorporated Trustees is a non-business and non-profit making body incorporated by a community of persons bound together by custom, religion, nationality or any association of person established for religious, educational, literary, scientific, social developments, sporting or charitable purpose. Just like a company limited by guarantee Incorporated Trustees is incorporated for charitable purposes, however, unlike a company limited by guarantee, it cannot carry on business. section 8 (1) (c) and (d) of the CAMA, 2020 gives the Corporate Affairs Commission the power to arrange or conduct an investigation into the affairs of incorporated trustees where the interest of members or the public so demands, including ensuring compliance with the provisions of the Act and relevant regulations made by the Commission. Section 839 empowers the Commission to suspend the trustees of an Incorporated Trustees and appoint an interim manager, on the order of a Court.
- Company: The other form in which a business can be registered in Nigeria a company. A company is a legal entity separate from its members, also known as shareholders. Once a company is registered, it assumes a life of its own and its activities and existence are considered separate from that of its members. A company can be registered as either a private or public company under the CAMA 2020. Also, the liability of the members of a private or public company can be limited to shares, limited by guarantee or unlimited. The different types of companies that can be registered in Nigeria are as follows:
- Company Limited by Shares
This is a company in which the liability of its members is limited to the amount of shares subscribed to by the member but not paid, they are known as shareholders i.e. In the event, the company winds up or becomes insolvent, they will not be liable, only that members that did not fully paid up the value of shares are held liable in the company.
- Company Limited by Guarantee
This is a company in which the financial liability of its members (known as guarantors), in the event of it being wound up or insolvent, is limited to the amount undertaken to be contributed to the assets of the company, which cannot be less than N100,000. It is a form of company in which members of the company agree to contribute a certain amount (not less than N100,000.00) to the assets of the company such that the amount guaranteed can only be demanded at the time of it being insolvent. This type of company requires the consent of the Attorney General of the Federation for its registration and profit made from the Company can only be for the promotion of commerce, art, science, religion, sports, culture, education, research, charity or other similar objects and not distributed to the members i.e. the Company does not distribute its profits to its members but rather apply them solely for the promotion of its objects or use them for some other charitable purpose. These companies are exempted from paying taxes in Nigeria. In summary, a Company Limited by Guarantee is formed for promoting commerce, art, science, religion, sports, culture, education, research, charity or other similar objects, and the income and property of the company are to be applied solely towards the promotion of its objects. It does not usually have a share capital or shareholders but instead has members who act as guarantors.
- Unlimited Liability Company
An unlimited liability company in Nigeria is one where its members’ financial liability in the event of it being wound up has no limit. Where the financial liability of the company exceeds its assets, the company may reach into its members’ personal property to liquidate its debt. In other words, its members have a joint and non-limited obligation to contribute to the assets of the company to enable settlement of its financial liability, if any, in the event of the company’s insolvency. Therefore In the event of an unlimited company being wound up, and its liabilities exceed its assets the members will be made liable. The principle of joint, several and non-limited liability of the members or shareholders of such unlimited Company is mainly l to meet any insufficiency in the assets of the Company is to settle its outstanding liabilities if any exist.
- Single shareholder company
The recently enacted Companies and Allied Matters Act (“CAMA”) 2020 allows companies registered in Nigeria to have a single shareholder and single director. The single shareholder structure is suitable for individuals and corporate entities (especially foreign investors) who want to establish wholly-owned entities in Nigeria. The previous mandatory requirement to have a minimum of two (2) shareholders resulted in a practice where some entities had nominee shareholders with one share. The new regime will allow Nigerian incorporated companies with such nominee arrangements to become single shareholder companies by transferring the share(s) held by the nominee shareholder to the majority shareholder. A welcome game-changing innovation of the single shareholder structure is that single shareholder companies are no longer required to hold mandatory annual general meetings.
The above are company structures in Nigeria. Before registering a Business entity the owner must understand that the choice of business structure is a critical aspect of business formation as it determines the legal framework under which a business may operate. It also informs the cost of setup and operation, tax obligations, minimum compliance requirements, etc.
- Companies And Allied Matters Act 2020.