Choosing the Right Business Structure in Nigeria

As a business owner, the first thing to do is to register your business and it is important to ensure that you choose the right business structure in Nigeria. In this article, we will look at the various forms of business structure in Nigeria and how to choose the right one.

Importance of choosing the right business structure in Nigeria

1. It ensures you comply with CAC guidelines for registration.
2. Choosing the right business structure will provide a good foundation for your business.
3. It helps you save money by doing the right thing.

Types of business structures in Nigeria

1. Business name
2. Company limited by shares (private and public)
3. Unlimited company (public and private)
4. Company limited by guarantee.
5. Incorporated trustee (NGO, associations, social clubs, religious organizations)
6. Partnership (general partnership, limited partnership, and limited liability partnership)

Factors to Consider When Choosing a Business Structure

There are some factors to be considered when choosing a business structure and they are:

1. Liability Protection is a means by which businesses limit their exposure to risks that may arise from potential lawsuits or claims. It is important for businesses to have adequate liability protection in place to safeguard their assets, reputation, and overall financial well-being.
2. Ownership and Control involves the legal, regulatory, and operational considerations. Businesses can be structured in various forms and each structure has implications for ownership and control. For instance, in a limited liability company, ownership is typically represented by shares, and control is often exercised through boards of directors and shareholders. For incorporated trustees, control is exercised by the trustees while in the case of a business name, ownership and control is exercised by the proprietor.
3. Tax can significantly impact your business’s profitability, cash flow, and overall financial health. Different business structures have distinct tax structures and understanding these implications can help you make an informed decision.
4. Funding and investment opportunities are significant factors to consider when choosing a business structure. The structure you select can impact your ability to attract investment, raise capital, and access funding from various sources. Different business structures have varying levels of attractiveness to investors and lenders. In most cases, registering your business as a company gives you more access to funding opportunities.
5. The structure you select should align with your vision, growth plans, and exit strategy.

Understanding the types of business structures in Nigeria

Business Name

A business name can also be referred to as sole proprietorship. It is a one-man business where liabilities and assets are owned by the proprietor. The business owner operates in his or her personal capacity while trading with the business name. The business owner represents the business in all situations since it does not have its own legal personality. This form of business registration is open to only Nigerians and is mostly used for small and medium-sized enterprises (SMEs).

 Advantages of Business name in Nigeria

1. Registering a business name is simpler and has a straightforward process compared to other forms of business registration.
2. The registration fees for a business names are lower than that of other business structures.
3. Making decisions in this business is easy as the proprietor does not need to consult with anyone as he has full control over the business. This makes decision making faster.

Disadvantages of Business name in Nigeria

1. One of the main disadvantages of business name or sole proprietorship is that the proprietor is personally liable for the debts, obligations, and legal liabilities of the business. This means that your personal assets could be at risk if the business encounters financial difficulties or legal issues.
2. Although this form of registration is suitable for small and medium-sized enterprises, but it may limit the proprietor ability to expand or pursue larger business opportunities. Some organizations or government agencies may prefer to work with registered companies for certain contracts or projects.
3. When seeking external funding or investment, a registered company might be more attractive to investors and lenders. Business names may have a harder time accessing capital from banks, venture capitalists, or angel investors.
4. The perception of a business name as a smaller or less formal entity may impact your ability to attract and retain skilled employees who might prefer the stability and benefits associated with larger companies.
5. Certain legal activities, contracts, licenses, or agreements may require a more specific business structure such as a limited liability company to be recognized or enforceable. Operating as a business name might limit the ability to engage in certain business transactions.
6. If the proprietor of a business name passes away or is unable to continue running the business, it might be more difficult to ensure continuity and succession considering that the business is built around the proprietor.
7. The business owner is personally liable for the taxes due from their business considering that the business does not have its own legal personality.

Appropriate Business Types for Sole Proprietorship  

Generally, Nigerians can register any business as a business name as far as it does not fall under the CAC list of businesses that must be registered as companies with prescribed share capital (we have talked about this in a previous article; you may read our article on Minimum Share capital ).

Partnership

Partnership is a form of business registration where two or more individuals or entities come together to carry on a business with the goal of making a profit. It is formed based on the mutual agreement of parties and mostly governed by a partnership agreement.

Advantages of setting up a Partnership business

1. Partnerships allow individuals with complementary skills, knowledge, and resources to come together. This pooling of expertise can lead to better decision-making and more effective management of the business.
2. Partners can divide the responsibilities of running the business among themselves, reducing the burden it would have been on one individual and it also promotes specialization.
3. Partners can contribute capital to the business, which can help in raising funds for operations, expansion, or investments.
4. Since partners share the profits and losses of the business, the risk is also distributed among them.
5. Partnerships are relatively easy to form and can be flexible in terms of decision-making, management structure, and goals. The partnership agreement can be tailored to suit the specific needs and preferences of the partners.

Disadvantages of setting up a Partnership business

1. One of the biggest disadvantages of partnerships is that partners have unlimited personal liability for the debts and obligations of the business. If the business cannot cover its liabilities, partners’ personal assets can be used to satisfy the debts except in the case of LLP.
2. Disagreements among partners can arise, leading to conflicts that may hinder decision-making and disrupt the smooth operation of the business.
3. While profit-sharing is an advantage, it can also become a disadvantage if there is a significant disparity in the contributions or efforts of partners. Unequal sharing of profits can lead to resentment.
4. Partnerships may dissolve or face challenges if one partner decides to leave or dies. The partnership’s continuity is dependent on the willingness of the remaining partners to continue or find new partners.
5. The success of a partnership is often contingent on the skills, dedication, and financial stability of all partners. If one partner faces personal or financial issues, it can affect the entire business.
6. Partnerships do not have a distinct legal personality from the partners themselves. This can make it challenging to raise capital, enter contracts, or own assets in the name of the partnership.

Types of Partnerships

In Nigeria, partnership is of three types, it can be registered as;

1.     General partnership,

2.     Limited partnership

3.     Limited liability partnership

A general partnership is of a similar nature as a business name. In limited partnership, it comprises of general partners and limited partners (this is similar to shareholders). There must be at least one general partner and one limited partner. Limited liability partnership (LLP) has a similar structure as a limited liability company.

Considerations for Choosing a Partnership Structure

Choosing the right partnership structure is an important decision that requires careful consideration. When deciding on a partnership structure, there are some things to take note of and they include:

1.     Nature of Business

2.     Number of Partners

3.     Liability issues

4.     Profit and Loss sharing

5.     Decision-Making and Management

6.     Skills and Resources

Limited Liability Company (LLC)

This is a type of business structure that offers limited liability protection to its owners (shareholders). The company has a separate legal personality, meaning that it is responsible for its actions. This form of registration can either be a private or public limited liability company.

Advantages of a limited liability company

1. Shareholders are only liable to the extent of shares they hold and are protected from the company’s debts and liabilities. This form of ‘limited liability’ provides a level of financial security.
2. An LLC is a recognised legal entity, which can enter contracts, own property, and conduct business in its own name, separate from its shareholders.
3. LLCs offer a form of management structure to shareholders such that they can appoint directors who would oversee the day-to-day operation of the company.
4. A company enjoys perpetual existence regardless of changes that might occur in ownership or the death of shareholders, except the shareholders decide to go into mergers or be acquired. This provides stability and continuity to the business.
5. Shares can be transferred to other parties. This allows for changes in ownership of the company without disrupting the business operations.
6. Registering a company makes the business more attractive to potential investors and opens it up to funding opportunities such as loans, grants from government, individuals and other organizations.

Disadvantages of a limited liability company

1. Setting up an LLC involves legal and administrative processes, including registration with the Corporate Affairs Commission (CAC), drafting articles of association, and other required documents.
2. Formation and registration fees, as well as professional fees for legal assistance, can make the initial setup of an LLC more expensive.
3. Information about shareholders, directors, financial statements, and other company details is publicly available, which may affect privacy and competitive concerns.
4. Compared to public limited companies, LLCs might face challenges in raising significant capital from the public through stock exchanges. This is because they cannot raise funds from the public.
5. As an entity with separate legal personality, there are formal requirements for meetings, resolutions, and reporting that must be adhered to.
6. Selling shares or exiting the company can be more complex than other business structures, especially if there are restrictions on share transfer in the company’s articles of association.

Steps to registering a limited liability company in Nigeria

When registering a business, the following are required:

1. Choose a business name.
2. Conduct a name search.
3. Apply for a name reservation (the name is valid for 60 days upon approval)
4. Upload the required details.
5. Pay filing fees and stamp duty.
6. Upon review, the registration would be approved, and incorporation documents issued and the tax identification number (TIN) is usually put on the bottom of the certificate

What do you need to register a Company in Nigeria – Company Registration Requirements

Why Choose an LLC Structure

When choosing an LLC structure for your business, there are several things to take into consideration such as:

1. Limited liability
2. Transfer of ownership
3. Statutory requirement
4. Growth and development of the business

Public Limited Company (PLC)

This form of business structure is like a private limited liability company but also has the ability to offer its shares to the public and is listed on the stock exchange. Being a public company there are certain things that are required such as having a company secretary, holding annual general meeting and compliance with certain regulations.

Advantages of a public limited company

1. Considering the nature of PLCs, they can raise capital by issuing shares to the public through Initial Public Offerings (IPOs) and subsequent offerings on the stock exchange. This means of funding can support business growth, expansion, and investment in new projects.
2. Being listed on a stock exchange enhances the company’s credibility and reputation.
3. The shares of a PLC are traded on the stock exchange; this provides shareholders with the ability to easily buy or sell their shares. This can also attract investors to the company.
4. PLCs has a more structured setting and as such can offer more attractive incentives to employees. Some of these incentives include employees stock ownership and share-based compensation programs. This helps boost employee’s productivity.
5. The ability to raise capital through the public opens the company to mergers, acquisitions, joint ventures, and other strategic partnerships.

Disadvantages of setting up a public limited company

1. PLCs are subject to extensive regulatory compliance because they are held to a higher level of compliance, and this can cost a lot and be time-consuming.
2. The value of a company’s shares in the stock market can be subject to significant fluctuations due to certain market conditions, economic factors, industry trends, and company-specific news.
3. PLCs are required to disclose detailed financial and operational information to the public and this can reveal sensitive business strategies and potentially provide insights to competitors.

Steps to registering a public limited liability company in Nigeria.

When registering a business, the following are required:

1. Choose a business name.
2. Conduct a name search.
3. Apply for a name reservation (the name is valid for 60 days upon approval)
4. Upload the required details.
5. Pay filing fees and stamp duty.
6. Upon review, the registration would be approved, and incorporation documents issued and the tax identification number (TIN) is usually put on the bottom of the certificate

Registration Requirements for public companies

1. Two alternative names
2. Nature of business and objectives
3. NIN slip, signature, passport, phone number, date of birth, email address, state, city, street, local government area and street number of director, secretary, witness, shareholders
4. Share spilt among shareholders (note that people with 5% shares and above will be made persons of significant control in the company)
5. Email, phone number, state, city, street, street number, local government area of business

Why Choose a PLC Structure

1. Access to Capital
2. Size and Growth Plans
3. Shareholders’ interests
4. Corporate Governance
5. Financial Readiness

Incorporated Trustees

This can also be referred to as a non-profit or charitable organisation. It is a specific form of registration designed for organizations and associations that are established for religious, educational, literary, scientific, social, cultural, sporting, or charitable purposes. The purpose of these organizations is for the public benefit and not for private gain. Compared to business organizations, the individuals that manage the affairs of the organization are referred to as trustees.

 Advantages of establishing an Incorporated Trustee

1. Registering the organization gives it legal recognition.
2. Incorporated trustees enjoy perpetual existence such that the organization continues to exist notwithstanding changes in leadership or membership.
3. Registering the organization with CAC enhances its credibility and trustworthiness in the eyes of donors, sponsors, partners, and the public at large.
4. Registration with CAC opens the organization up to fundraising opportunities from donors, grant-making organizations, and government agencies. Many funding sources require legal recognition for grant eligibility.

Disadvantages of establishing an Incorporated Trustee

1. Registering an incorporated trustee has a lot of complex procedure and it takes a longer time frame compared to business registrations.
2. The cost of registering an incorporated trustee is way more expensive compared to any of the other forms of business registration in Nigeria.
3. Organizations registered under this structure cannot engage in profit-making activities and are restricted to the objectives stated in their constitution.

Considerations for Choosing an Incorporated Trustees Structure

The most important thing to consider when deciding to register an incorporated trustee is the nature and objectives of the organisation.

Seeking Professional Advice and Legal Assistance

Seeking professional advice is crucial for making informed and sound decisions when it comes to deciding what form of business structure to go for. It helps get specialized knowledge on the structure of business you might want to go for. This would ensure you avoid costly mistakes, get a tailored service, and comply with required regulatory guidelines.

Consulting with lawyers and business consultants play an important role in deciding what form of business structure. Lawyers assist with legal compliance and business consultants with business strategy, operations, management, or other non-legal areas.

Understanding regulatory requirements and compliance

Regulatory compliance is an important aspect of every business in Nigeria and there are various laws, regulations, and government agencies that govern different business activities such as company registration, taxation, permits, industry-specific licenses, intellectual property protection etc.

Non-compliance with these regulatory guidelines can result in penalties, legal disputes, and reputational damage so it is important to adhere to these requirements and engage a professional to meet up with these regulatory requirements.

Conversion and Restructuring Options

Converting your business from one business structure to another form or structure of business in Nigeria is possible. This involves changing the legal form of your business entity. For example, this could mean transitioning from a business name/sole proprietorship to a limited liability company or changing from a private limited liability company to a public limited liability company. The process of converting from one business structure to another is based on the registration requirement with notification to CAC for the change of business structure.

However, before making such conversion, it is important to seek professional advice before and throughout the process to ensure a smooth and compliant transition. Failure to this might lead to legal and operational issues.

Considerations and implications of conversion and restructuring

As much as conversion and restructuring help in improving the business, there are certain things to take into consideration such as:

1. How it will affect the growth and development of the business
2. Legal and regulatory requirements
3. Financial impact

In Summary

Every form of business registration has its own advantages, disadvantages and compliance requirements. Before choosing a particular business structure, it is important to seek professional advice and conduct thorough research.

Firmus Advisory is a professional business consulting firm and with our years of experience, we are always willing to assist with your business needs. Contact us here today