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Legal Guide for Small & Medium Business(es) in Nigeria -

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March 22, 2012
 

 

Distinguish readers; I am honored to present to you this paper titled,

 
“LEGAL GUIDE FOR SMALL AND MEDIUM BUSINESS (ES)”.

 Let me start by saying from the beginning that the best legal guide for any business person who is interested in success is to undertake an actual consultation with his lawyers before leaping into any intended business, this advice is very important in view of the fact that there are no where in the world where legal questions and situation are the same, in most cases they are only similar, but distinguishable.
 

As you will no doubt agree with me, this article is very relevant at this point in time in the life of we as individuals and also as corporate entities, my conviction is that with the dawn of democratic governance in Nigeria and the ongoing economic liberalization programme of the government, this millennium surely holds a lot in stock for the imaginative and hardworking small and medium scale entrepreneur.
 

We shall now look at the various legal means by which a small and/or medium scale business person can exist and the legal implication of these various ways & means of doing business.

 
A.SOLE PROPRIETORSHIP
This can be described as a “One –man show “, as you know the law can not force you to be friend to anybody, neither can it stop you from being friend to only yourself, that is the foundation for allowing sole proprietorship of  business in law. 
 

Sole proprietor as the name implies is a business carried out strictly by one man. This can be carried out by the man either in his own natural names e.g.”Adebisi Iyaniwura “or under an alias i.e. trading under the name of ‘BISI IYANIWURA & CO. or “CHUKWU ALLAH &SONS”.
  

Where a persons carries on business as a Sole Proprietor in his natural name, the law does not require such a person to register, but where the person carry’s on business under an assumed name otherwise called business name, he is by the provision of S. 572 of the Company’s and Allied Matters Act 2004 (C.A.M.A) required to register such a name.
 

 Please note that there are legal restrictions on the names to be used. See S.579 of the CAMA 2004.


Part B of the Company’s and Allied Matters Act 2004 deals with the registration and regulation of the activities of a person who desires to carry on business under an assumed business name. 

 

Sole proprietorship has the following advantages and disadvantages;
 

1. Requires small capital to start compared to partnership or Limited Liability Company.
 

2. Ownership is not distinct from control and as such, the sole proprietor put his best into the management of the business.
 

3. Since the sole proprietor takes decision affecting the business without having to  consult any other person. This enhances the smooth running of the business as it avoids delay or internal wrangling or conflict that may arise in partnership & limited liability companies.
 

4. The sole proprietor knows that the success of the business is his personal achievement and thus cannot cheat or enter into liability that may affect the overall interest of the business, whereas in partnership, since one of the partners can be regarded as an agent of the partnership, he can commit fraud or other misconduct in the name of the partnership such may affect the overall interest of the partnership.
 

5. There is minimum legal restriction
 

6. A sole proprietor enjoys privacy and flexibility.
 

DISADVANTAGES. 

  1. The capital of the sole proprietor is small and it may not make room for expansion.

  1. The death of the sole proprietor means the death of the business but a partnership may continue even after the death of any of the partners while a limited liability company will surely outlive its members.
     
  1. Weak decision making process in view of the fact that there is nobody to be consulted by the sole proprietor, he may take a decision that  may lead the business to bankruptcy as opposed to partnership where there is a cross fertilization of ideas by partners and in the case of a limited liability company.
     
  1. The liability of a sole proprietor like that in the partnership is not limited to their business, their personal assets can be attached or affected by the business prospects.
     
  1. Poor working conditions and absence of training may lead to disability in terms of attracting qualified Man power.                                            

 

  1. PARTNERSHIP.  

Partnership can be defined or said to be a “Relationship which exist between two or more people carrying on business in common with a view to profit “ S.3 (1) Partnership Law Lagos State.
 

Thus before partnership can exist, 3 condition must be met
 

(1) There must be a business
 

(2)  The business must be carried on in common by two or more persons
.

(3) The business must be carried on with a view to profit. 
 

By virtue of section of section 19(1) of C.A.M.A, the minimum number of people allowed in a partnership is two (2) while the maximum number of people is twenty (20) people.

 

 The question of what constitutes a partnership has been judicially examined in the case of 
 

LAGRICOM CO. LTD.  .V.  U.B.N. Ltd.

where the court of appeal stated that the mere fact that two (2) traders use the same place of business does not necessarily make them “partners” without more, in essence, the court of appeal is saying that there must be overt acts on the part of the parties in line with the conditions earlier enumerated before a partnership can be inferred, in the absence of an expressed agreement as to intention to create a partnership.
 

One of the more peculiar characteristics is the joint liability of parties. It is the principle of law that partners are jointly liable, for the activities of the partnership, which occurs within the normal line of business of the partnership and such liabilities is without limit.
 

 Therefore it is advised that right from the conception of the partnership, the partners should put into proper perspectives, the scope and extent of their rights and the duties attached thereto, in order to safeguard against any ultra –vire activities. This position was well illuminated by the supreme court of Nigeria in the case of 
 

YESUFU .V. KUPPER INT’L N.V

Also every partner in a partnership is entitled to be indemnified for liabilities incurred by him on behalf of the partnership in the course of the business of the partnership, either as an ongoing concern or upon its dissolution 
 

To ensure a partnership that can stand the test of time, it is advisable that all the rights, obligation, retirement, liabilities of partner would be properly stated so in the event of any problems, the life of the partnership could continue. It is however doubtable if there can be an all embracing agreement especially when a senior partner of a partnership pulls out of a partnership. The foreseen consequences may undoubtedly be the end of the partnership.  

Secondly, where the agreement is documented and a partner contract in the name of the partnership where in fact he has no such authority, such a partner may be personally liable for such a debt but if it is on the contrary, the partnership may have to bear the burden of the debt.
 

Please note that there is no special mode of forming a Partnership, it may be inferred from the conduct of parties.

 The case of UREDI V DADA 1988 1 NWLR (PT 69)237SC is very instructive. 
 

It should also be noted that as general rule a minor under the age of 18years can not be a partner in a firm however, the Registrar has the discretion to refuse to register him or can accept his registration if the minor’s signature is countersigned by a Magistrate, Legal Practitioner or Police officer of or above the rank  of an Assistant Superintendent of Police.              

Also note that in a partnership a 3rd party can sue the partners individually since there is no distinct corporate personality between each partner and the partnership as a firm. see the case of  
 

IYKE MEDICAL MERCHANDISE  .V. PFIZER INC & ANOR (2001)10 NWLR (PT722) @540 -558.  
 
See also  

AT YOUR SERVICE   .V.  SUPER FINE AGENCY ORGANISATION (1974) N.C.L.R 503.  

Please take note that in the former Western region which comprises of OGUN, OSUN, OYO, ONDO AND EKITI States, Limited Partnership is registerable and recognized by virtue of the Limited Partnership Act of 1907.  
 

The limited partner does not take part in the management of the business and his liability arising from business failures or defaults are limited.  

The following are the advantages and disadvantages of a partnership viz a viz a company limited by share.
 

(1). In the case of winding up, the liabilities of subscribers of a company limited by shares is limited to the amount contributed by the individual subscriber and their personal effects  are “generally “ left  intact and untouched, while it is the opposite in the case of partnership, where creditors can proceed against the personal assets of the partners in order to satisfy their debts.
 

See IYKE MEDICAL MERCHANDISE V PFIZER as cited above
 

(2). A partnership can sue and be sued in the name of the partners, unlike a company limited by shares. See the case of
 

 AT YOUR SERVICE V SUPER FINE AGENCY ORGANISATION (1974) N.C.L.R 503  

(3). Generally speaking unless expressly provided in the partnership agreement, the death or insolvency of one of the partners may spell the end of the partnership   

(4). While the C.A.M.A expressly provides that a company must be registered before being called a company proper, a partnership agreement maybe oral; by conduct in writing or by deed. See

 
THOMPOULUS V MANDILAS 10 WACA 269

(5) Partnership is usually smaller in membership compared to a company limited by shares; the capital base of the partnership is normally smaller.
 

(6). The partnership is a personal investment, members always put in their best to ensure the success of  the partnership, but in a company limited by share, ownership is separate from control and thus, decision may be taken, which may terminate the life of the company, e.g. various banks that failed of recent.
 

(7). The bankruptcy of a partner can affect the whole partnership while it is not so with a company limited by shares.
 

8. There is minimum legal restriction in Partnerships and their activities so long as it is lawful unlike a registered company.
 

9. Partnerships activities are not subject to serious public scrutiny unlike the registered company.
 

10. There is also no serious formal Statutory Supervision of Partnerships and their accounts are not subject to public scrutiny.

 
DISADVANTAGES OF A PARTNERSHIP  

1. Partners can not provide security to their creditors by way of floating charge   over its asset like a registered company
 

2. The personal liability of Partners is unlimited 

3. Lack of Perpetual Succession. 

  1. PRIVATE  LIMITED LIABILITY COMPANY. 

Any two or more persons may form and incorporate a company upon fufillling certain statutory requirement for the type of company desired.
 

The company maybe ”Limited by share” i.e. having the liability of its members limited by the memorandum of association to the amount unpaid on the share respectively held by them (the shareholders) .(2) “Limited by Guarantee” i.e. having the liability of its members limited by the memorandum to such amount as the members may respectively thereby undertake to contribute to the assets of the company in the event of its being wound and (3) “Unlimited “ i.e. not having any limit on the liability of its members.
 

S. 21(1) of the companies and Allied matters Act 2004 makes it sufficient clear that a company whether limited by shares or by guarantees or unlimited maybe private or public.
 

The statutory requirement/conditions precedent which must be met before a company can be incorporated as provided in section 35(2) & (3) of the company and allied matters decree (hereinafter referred to as C.A.M.A.) are namely, the Articles of Association ( which can be regarded as the company’s constitution) and the memorandum of association which the document containing the assets of the company. Comply with S. 27 of C.A.M.A. by stating all what is provided in section 1(a)- (f) & 2 i.e. The subscribers must take up at least 25 percent of the authorized share capital at the time of incorporation the next step will be to visit the federal commissioner for stamp duties, two copies of the memorandum and Articles of Association, which must be stamped as deed in accordance with S.27(6) and two copies of the statement of nominal share capital.
 

The next point is the corporate Affairs commission which the body is charged with registration and regulation of the activities of the companies in Nigeria. The legal practitioner having paid the appropriate filling fees will deliver to the commission amongst others;
 

(1)  The memorandum and Articles of association; duly stamped, notice of the address of the registration office of the company and head office; statement of the list and particulars of first directors of the company with their consent; statement of authorized share capital and a statutory declaration by the legal practitioner that the requirement of the Act has been complied with.
 

Having complied the CAC has no discretion but to register the company S.36 C.A.M.A. The cases of
 

 

 

 

  1. LASISI  .V. REGISTRAR OF COMPANIES
  1. KEHINDE   V. REGISTRAR OF COMPANIES.
     

The CAC in certain stated cases has the power to refuse the registration of a company. 
 

The legal implications of incorporation upon registration by CAC include
 
(a)  From the date of registration, subscribers and any one who later becomes a member shall be a body corporate to be known by the name contained in the memorandum of Association.

(b)  The company shall be capable of exercising all the powers and functions of an incorporated company including the power to hold land.

(c)   The incorporated company shall have perpetual succession.

(d)   The incorporated company shall have a common seal and above all,

(e)  The incorporated company be a separate legal entity i.e. having the power to act as a natural person. See S. 37 C.A.M.A. and the famous case of 

 CO-OP BANK LTD.VS. OBOKHARE.   

From the foregoing one can easily conclude that an incorporate has many attributes conferred on it by the law upon registration.
 

However, in order to balance the equation so that an incorporated company may not operate in a manner contrary to the law creating to the law creating it, the C.AM.A.  Provides for remedies which are termed disadvantages to a company incorporated so that if an incorporated company deviates from the envisaged position of the law, any aggrieved member or persons affected can proceed against the members of the company or directors. This is called lifting against the members of the company or directors. This is called lifting the veil. For instance a director who has been fraudulent can be removed by virtue of S. 253 & 254 C.AM.A. as he stands disqualified already.   
 

The lifting of the veil of incorporation marks a change in the altitude of law to its own creation, i.e. the juristic personality of the Company. This change is not only peculiar to Nigeria but noticeable in the continent and in America.

 
The veil of a company will be lifted where the number of members is reduced below the prescribed minimum as provided in S.93 of the C.A.M.A and the company carries on business for more than six months while the number is so reduced amongst others. 

Any member who is or was aware of the defect within this period shall be jointly and severely liable for all the debts contracted by the company within this period. 

It should be noted that liability here is against the members rather than directors who would have had the knowledge of the reduction. This is provided for by S.93 of C.A.M.A. See the case of  

K.S.O & ALLIED PRODUCTS LTD. VS KOFA TRADING CO.LTD.  

Secondly, wherever a company is insolvent the person or persons who carry on business or is shown to have held all the company’s shares during this defined period shall be liable in respect of obligation of the company which existed during this period.

Thirdly, the veil of the company will be lifted if in the course of winding up, it is discovered that the business was carried on with intent to defraud creditors of the company or creditors of any other persons. See S.253 &254.
 

Fourthly, C.A.M.A.  Insist on the recognition of the separate entity of each individual company in associated companies within the same group enterprise as such, a holding company cannot sue to enforce a right which belongs to its subsidiary nor is it liable for its subsidiary breach of contract or tort.

 
One can infer from the various sections of C.AM.A earlier quoted, that the law never intended a company to be created without the requisite checks of its activities especially where the company goes contrary to its objects as contained in its memorandum of association. 
 

Conclusively, though the modern company in Nigeria enjoys or is conferred with a lot of attributes that makes it. carry out its activities smoothly however, the state on the ground of public policy makes provisions for the checks probably on the tortuous principle that “a man should not profit from his own wrong”
 

Please note that the total number of members in Private Company should not exceed fifty excluding persons who are bonafide in the employment of the Company or ex employees who after the determination of their employment continued to be shareholders in the Company. See Section 22(3) of the CAMA 2004.

A Private Limited Company is however exempted from holding the compulsory Statutory Meeting required to be held by a Public Limited Company within a period of six months from incorporation. See S211 of the CAMA 2004.  

A private limited Company can not issue out its shares to the Public to subscribe to and the transfer of its shares is restricted to members of the Company. In other words a member of a Private Limited Company who desires to dispose his/her shares can only transfer such shares to a member of the company.

Though the statutory requirement as expected of a limited liability such as the filling of the different returns is enormous, but the advantages are also very much and it is very much recommended.  
 

Lastly, I will still remind you that the best safeguard is to consult your lawyer(s).  
 

DISCLAIMER NOTICE: This Legal Alert is a free educational material, for your general information and enlightenment ONLY. This Alert, by itself, does not create a Client/Attorney relationship. Recipients are therefore advised to seek professional legal counseling to their specific situations when they do arise. Questions, comments, criticisms, suggestions, new ideas, contributions, etc are always welcomed. This Legal Alert is protected by Intellectual Property Law and Regulations and is reproduced by Proshare Nigeria Limited under permission for the Proshare online investment community. Broadstreet Partnership [bisi.iyaniwura@broadstreetpartnership.com.ng]
 

 

A.L. IYANIWURA ESQ.
Managing Consultant / CRO
BROADSTREET PARTNERSHIP



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