Wednesday, March 8, 2017 7:00am / Chukwuemeka Hargley*
When registering a business in Nigeria it is very important to consider the appropriate business structure for your business.
The following are some of the types of business structures in Nigeria.
A sole proprietorship is a business that is owned and controlled by a single individual. The business owner alone enjoys and suffers all the profits and loss of the business. Sole proprietorships may choose to operate under a registered business name. However, where the business name consists of words other than the surname and forenames (or their initials) of the business owner, it must be registered with the Corporate Affairs Commission (CAC).
The business owner only pays personal income tax in his/her state of residence.
Key features of a sole proprietorship include personal liability of the business owner for the business debts, cheap and easy formation/registration, and informal administration.
Sole Proprietorships are suitable for micro-small, small businesses and professional businesses (law, accountancy, photography, etc) owned by one person.
Generally speaking, a partnership is the relationship between two or more (not more than 20) people who carry on a lawful business in common with the aim of making profit. The members, who may be individuals and or companies, are individually called partners and collectively called a firm. As with sole proprietorships, where the firm does business under a name consisting of words other than their true surnames and forenames (or the initials thereof) then the business name must be registered with CAC.
The partners pay personal income tax on their individual share of the partnership profits as a partnership is not a legal entity.
Members of a partnership enjoy the advantages that come with pulling resources together.
GENERAL/ORDINARY PARTNERSHIP: The key features here are: mutual agency of the partners, unlimited and joint liability of the partners for the partnership debts, ease and inexpensiveness of formation, informal and flexible decision making process, restriction on transfer of partnership interest, etc.
Unless it is otherwise agreed to by the partners, all the members are equal partners and are entitled to share equally in the partnership capital, profits, have equal management rights, and contribute equally to its losses.
It is strongly advisable, though not compulsory, to have a written partnership agreement governing the partnership and to speak with a lawyer when forming a partnership. The partnership agreement though not a registration document is binding on all the partners.
General Partnerships are suitable for micro-small, small and medium sized businesses and where professional and business colleagues, friends and family want to leverage on their collective strengths and resources for business purposes without having to incorporate a company.
THE LIMITED PARTNERSHIP
As the name suggests, a limited partnership is a partnership in which the liability of some of its members for partnership debts and obligations is limited. In a limited partnership, one or more of its members are general partners and one or more of its members are limited partners. The general partner(s) have unlimited liability as to the debts and obligations of the firm and have managerial powers.
Limited partners do not have any managerial powers, cannot bind the partnership and are liable for the firm’s debts and obligations only to the extent of their financial contribution to the partnership. It is for this reason that limited partnerships are described as essentially investment devices with the limited partners being the investors (silent partners).
Asides from the registration of the business name at the CAC, limited partnerships are basically formed by submitting to the Registrar of Limited Partnership in the partnership registry of the state where the partnership is located, a statement signed by all the partners containing the required particulars of the partnership. At present, it seems only Lagos State has a partnership registry.
Limited Partnerships allow businesses to raise additional capital without being incorporated and are essentially suitable for sole proprietors and general partners seeking to raise additional capital without the liabilities and interest rates of a business loan while still retaining full control of their businesses. Big corporations and medium scale enterprises can also use Limited Partnerships to raise additional capital.
It is also suitable for investors seeking to invest in profitable and growing businesses without expending time on the managerial aspects of the business.
It is also advisable to have a written partnership agreement when forming a limited partnership. All registered limited partnerships must use the abbreviation “LP” after their partnership name.
LIMITED LIABILITY PARTNERSHIP
In a limited liability partnership (LLP), all of the partners have some measure of limited liability, can take part in the management of the partnership and are only personally liable for acts of the partnership in the following circumstances:
“Cases of fraud, misrepresentation, and other improper conduct alleged to have been committed by the limited liability partner, and With the written consent of the Commissioner (for justice) where it is established that it is in the reasonable interest of the public for an action to be maintained against an individual limited liability partner.”
Other than this, a limited liability partner is liable for the debts or action or inaction of the LLP and also upon its dissolution “only to the extent subscribed by such limited liability partner under the current registration document and/or partnership agreement.”
These features of an LLP make it similar to an incorporated company and distinguishable from a general partnership where the partners are not only agents of the partnership but are also agents and principals of each other. In an LLP, the limited liability partners are only agents of the LLP and, except as stated above, are only responsible for the debts, acts and inactions of the LLP to the extent of their subscription.
At present, it seems only Lagos State, by virtue of its Partnership Law (Amended), 2009, has a registry of Limited liability Partnership.
Limited Liability Partnerships are formed by submitting to the Registrar of Limited Liability Partnership the following: evidence of payment of initial registration fees, the completed registration document along with a copy of the partnership agreement where there is one. This is in addition to registering the business name at CAC where applicable.
Limited Liability Partnerships must use the abbreviation “LLP” after their partnership name.
LLPs which are considered a hybrid form of incorporated companies and partnerships are suitable for professional firms which are prohibited by law from operating as companies. It is also suitable for small and medium scale businesses where the owners would like to limit their liabilities without going through the process of incorporation.
REGISTERED COMPANY LIMITED BY SHARES
A registered company limited by shares is a type of business enterprise which is a legal entity separate from its members or owners and in which the liability of its owners for its debts and obligations are restricted only to the unpaid amount of share capital they have subscribed to.
The process of setting up a company is referred to as registering or incorporating a company. Registration or incorporation of companies is usually costlier and involves more time and documentation than other types of business structures. Although recently, the Corporate Affairs Commission consolidated all the forms necessary for registration into one as part of its commitment to facilitate the ease of doing business in Nigeria. Registration or Incorporation is under taken at the Commission and is typically handled by lawyers and other accredited professionals, chartered secretaries or accountants.
The process of registration is by payment of the requisite incorporation fees, submitting duly stamped copies of the Memorandum and Articles of Association along with other completed incorporation documents at CAC.
Key features of an incorporated company limited by shares include:
Separate legal personality from that of its members, capability of perpetual succession, management by the board of directors, formal meeting and administrative procedures, regulatory oversight, larger membership than other forms of business association and separate incidents of taxation due to companies income tax.
There are two types of registered companies limited by shares in Nigeria: private companies and public companies.
According to S. 22 of CAMA, a private company is one which is stated in its memorandum of association to be a private company.
Features of a private company limited by shares
a) Its name must end with the word “Limited” or its abbreviation, “Ltd.”
b) It must by its articles of association restrict the transfer of its shares.
c) Its authorized minimum share capital is N10,000 of which 25% of it must be subscribed to by its founding members at the stage of incorporating the company.
d) Its total number of members cannot exceed 50 persons (either individuals or companies) excluding bona fide employees of the company or former employees who have after their employment continued to be members of the company.
e) It is prohibited (unless authorized by law) from offering its shares or debentures to the general public and from inviting the public to deposit money for fixed periods or payable at call, whether or not bearing interest.
f) It has no formal requirements for the position of a company secretary. However, it is the duty of its directors to ensure that a person(s) appointed as company secretary is one who in their opinion has the requisite knowledge and experience.
g) There is also no restriction on appointment of persons over the age of 70 as directors of the company.
Suitability of a private company limited by shares
A private company limited by shares is generally suitable as a business structure in the following instances:
Capital: when a small or average amount of capital is required or available for doing business. The minimum share capital is N10,000 and the fees required for its registration are relatively inexpensive. However, this does not preclude the structure from being used when a rather large amount of capital is available for doing business. Many big companies (by size of capital) are organized as private companies.
Control: when a greater degree of control over the affairs of a company is sought, it is generally advisable to incorporate a private company as it is subject to lesser regulatory supervision than a public company and also has less strict guidelines for its operations.
Membership: when the membership of a company is intended to be comprised of only family members, close friends or business associates, then a private company is advisable as it has a stipulated maximum number of members and must by its articles of association restrict the transfer of its shares.
Additionally, for reasons of membership and greater degrees of control, the private company is the preferred means of doing business in Nigeria by foreign companies.
Small and Medium Scale Enterprises (SMEs): A private company is the generally preferred form of business structure for SMEs as it makes for easier access to capital and allows its members enjoy the benefits of incorporation.
A public company is a company other than a private company and whose memorandum of association states that it is a public company: see S. 24 CAMA.
Features of a public company limited by shares
a) Its name must end with the words, “Public Limited Company” or its abbreviation “PLC.”
b) There is no restriction on transfer of its shares and it can offer its shares and debentures to the general public.
c) Its minimum authorized share capital is N500,000 of which 25% of it must be subscribed to by its founding members at the stage of incorporating the company, that is, by the subscribers to the memorandum of association.
d) Its articles of association must also be in conformity with the regulations of the Nigerian Stock Exchange where it is expected that the company will be listed on the Nigerian Stock Exchange.
e) There is no stipulated maximum number of members.
f) Only persons with the requisite professional certification; ICAN, ANAN, ICSAN, B.L (Legal practitioners) or experience may be appointed as its company secretary.
g) Persons who are over 70 years of age may only be appointed as its directors subject to the fulfillment of certain statutory conditions.
h) By virtue of S.211 (1) CAMA, it must hold the statutory meeting within 6 months of its incorporation.
Suitability of a public company limited by shares
A public company limited by shares is generally suitable as a means of doing business in the following circumstances:
Law: Where extant laws and industry regulations stipulate that a business be registered as a public company limited by shares.
Capital: By virtue of its larger authorized minimum share capital and due to its ability to access funds from the public, a public limited liability company maybe suitable for doing business in the following circumstances:
i. where a rather large amount of capital is available for doing business; or
ii. where a large amount of capital will be required to set up the business, either by virtue of industry regulations which specify the minimum share capital for certain business operations or basically because a large amount of capital is needed to start the business.
Stock Exchange: Where it is expected or desired that the stock of the company will be quoted on the Nigerian Stock Exchange.
Membership: where membership of the company is envisaged to be comprised of a large number of persons who are likely to be unrelated to each other.
General factors to consider before choosing a business structure
The features and suitability of the above business structures should help in determining which business structure should be used. Below are simply general guidelines.
Name: Except as mandated by law, sole proprietorships and partnerships need not register their business names while names of incorporated companies must be registered and must end with the words, “Limited”, “Ltd” or “Public Limited Company”, “PLC” as the case may be.
Purpose/object: This is a very important and determining factor. More so, as by law certain businesses can only be operated using a particular structure(s) .
Limited partnerships are generally suitable as an alternative investment option and as a means of raising additional capital.
Limited liability partnerships are suitable for professional firms where incorporation as a company is prohibited.
In addition, a combination of structures may be appropriate in certain circumstances. For example, a registered company may register a business name for the operation of a franchise business operation or school.
Regulatory/Compliance issues: Sole proprietorships and partnerships are largely free from regulatory interference except where the business activity itself is a regulated one. In contrast, regulatory oversight and compliance are basic features of incorporated companies, and PLCs in particular. Additionally, by virtue of extant laws, foreign companies, except in select instances, can only do business in Nigeria as a registered company.
Time and documentation involved in registration/formation: Where time is of the essence, it should be noted that certain structures involve more time and documentation than others. Sole proprietorships and partnerships are quite easily and quickly formed with little or no documentation involved.
In contrast, incorporated companies take a longer time and require additional documentation. In addition, by law, certain companies must, before or after registration with the Corporate Affairs Commission, be registered with the relevant regulatory body before commencement of business activities. Such preliminary and subsequent registrations naturally mean more time and documentation.
Ease of administration: Sole proprietorships and partnerships by their natures enjoy flexibility and simplicity of administration while incorporated companies with their formal meeting requirements have more formal administrative processes.
Additionally, unlike sole proprietorships, partnerships and incorporated businesses may be able to take advantage of the collective expertise and experience of partners and directors respectively to bring about an effective and efficient sharing of management responsibilities.
Membership: Partnerships and private companies limited by shares are great for businesses with a small number of members or where the membership is to be comprised of family members, close friends or close business associates. Public companies limited by shares are suitable for businesses that intend to have really large and very diverse membership. Sole proprietorships are essentially one-man businesses.
Taxation: Tax incidences vary depending on the choice of business structure. Sole proprietorships and partnerships are subject to personal income tax, while incorporated companies are generally subject to companies income tax.
Cost of registration and Capital requirements: These are determined by the scale of business activity intended to be undertaken and industry regulations pertaining to the proposed business.
Generally speaking, registration of business names and limited and limited liability partnerships are inexpensive compared to the cost of registration for incorporated companies which may vary depending on the required authorized minimum share capital and other factors.
Capacity: Individuals, firms, and companies may freely register business names except minors and persons who have previously been involved in fraudulent trade malpractices locally or internationally. Minors may only take part in the registration of a business name subject to the discretion of the Registrar of the Commission and even then, the minor’s signature must be accompanied by a Magistrate, Legal practitioner or Police officer not less than the rank of an Assistant Superintendent of Police.
Persons that may take part in the formation of a company include both natural persons and corporate bodies except in the following instances:
1. Where the individual is less than 18 years of age, unless there are two other members who are not legally disqualified from being members of a company;
2. Where the individual is of unsound mind and has been so found by a court of law in Nigeria or elsewhere;
3. Where the individual is an un-discharged bankrupt;
4. Where the individual is disqualified under S.254 of the Companies and Allied Matters Act (CAMA), 2004 from being a Director of a company. S.254 deals with the restraint of persons guilty of an offence connected with the promotion, formation, and management of a company.
5. Where it is a body corporate in liquidation;
6. Where the Memorandum of Association of the company restricts it from being a member of a company.
7. Note also that a foreign company or an alien (a foreign citizen) may take part in the formation of a Nigerian company provided it or he/she has complied with the existing applicable laws.
Choosing the appropriate business structure is pivotal to running a successful business. As such, care should be taken to select the best fit for your business.
This article is only for general information purposes and is not to be construed as legal advice. You should always seek legal advice from a lawyer in respect of your individual situation.
*Chukwuemeka Hargley is a lawyer based in Nigeria’s Federal Capital Territory, Abuja. He represents and advises entrepreneurs and businesses and may be reached via firstname.lastname@example.org