SME's DIY: Should I register a business name or incorporate a company?SMEStudio
Usually, the earliest legal question on most Nigerian Startup Founders’ lips is, “what is the better legal entity, a Limited Liability Company (that is, a company with the suffix “limited” or “ltd”) or a Business Name. My response to this question doesn’t come earlier than I have first understood the corporate strategy and vision of the business which would ultimately determine what form of business structure is most suitable for the startup.
It will be useful to briefly mention the general form of business structures that there are in Nigeria at the moment. Depending on the plans and vision of a business, the options available to choose from are – generally – incorporating a Limited Liability Company, registering a Business Name or registering a Partnership. Now let’s consider these structures in turn.
Private Limited Liability Company – Pros
A Limited Liability Company could either be private or public. While the latter is more useful for Companies that intend to raise funds from the public by issuing shares for the public, the administration, management and control of the former is more private in nature and the shares of such companies are not available for the members of the public. So in Nigeria, it is safe to say that when businesses are talking about incorporation of company, they mean incorporation as a Private limited liability company (Limited by Share).
There are myriad advantages of registration (or incorporation) as a Private Limited Liability. The most obvious of these advantages is the fictional legal personality that the law confers on such a Company upon registration. Once a Company is registered at the Corporate Affairs Commission (CAC) and a Certificate is issued in this regard, the Company becomes a “person” and enjoys the benefit which would ordinarily be conferred only on a natural person such as ability to purchase property in its own name, right to sue, right to be sued, etcetera.
Flowing from this benefit is the fact that the law sees the Company as different from its Members. This means that a registered Company cannot be sued for the liability of its Members and vice versa (although there are exceptions to this in cases where a Member is acting as an agent of the Company or where the Members are using the Company for a fraudulent purpose).
Private Limited Liability Company – Cons
One discouraging factor whilst embracing this entity structure is its strict adherence to statutory rules. The Law requires close monitoring and regulation of the affairs of a Company in the interest of commerce and national economy. Companies are required by law to notify the CAC (or seek permission in appropriate cases) on any change that occurs in the Company. The registration of a Company is also usually more expensive than that of a Business Name.
Surprisingly however, I’ve seen many startups presume they’ve registered a company when all they’ve got is a Business Name registration. It’s easy to know your entity structure if you’ve registered one already. Aside from employing the cost-of-registration test to determine the type of business entity, one other way is checking the entity’s certificate which would show what type was registered. Whilst a Business name has a BN number, a Company name has an RC Number and it usually ends with “ltd” or “limited”.
Business Name Registration – Pros
A Business Name registration is most suitable for one-man business and businesses that are not really looking forward to raising capital through issuance of shares. There are even no shares under this entity structure anyway, so the regulatory complexities are way reduced. The ease of running a Business Name starts with the registration process. Unlike the case of Company registration, you do not necessarily need the services of a Lawyer to register a Business Name.
Business Name Registration – Cons
Anyone undertaking this type of business should be prepared to accept the hazards that come with it. The Founder under a Business Name structure is not protected by the law in that he is responsible for all the liabilities in the business. In the event of law suit for example, both the assets of the business and that of the Founder can be reached. The Founder enjoys no form of legal protection whatsoever. Due to the lack of protection that characterizes this structure, Investors and other corporate entities are usually reluctant to engage this structure in any serious business relationship.
Partnerships are usually formed by two people that come together with the aim of making profit in business. The ceiling number of partners that can form this type of structure is 20 although the law recognizes some instances where such a structure may have more than 20 as in the case of professionals like Lawyers, Accountants etcetera. Just like Business Names, this structure is not strictly regulated and it does not enjoy a different legal personality separate from its partners. The liabilities of partners are also unlimited save for cases of limited partnership where some partners may opt to limit their liabilities. Generally under Partnership, Partners are personally liable for their individual acts and the acts of the partnership itself. There is however a new development on partnership in Lagos State known Limited Liability Partnership (LLP) where all partners have the option of limiting their liability under the Partnership.
Choosing the Right Entity
Choosing the right entity structure for your business ranks up there with choosing the right partner for your business. Your decision on what type of structure best suit your business depends on your corporate strategy and strategic questions like, whether you intend to raise funds from other people? What type of Business do you want to run? whether you intend to operate a Sole Proprietorship structure?
As a lawyer, I usually advise Founders to opt for a Limited Liability Company due to its several advantages, chief of which is the legal protection to members (i.e its separate legal personality). However, there is no one-size-fits-all approach, every business has its peculiarity, and nothing stops a Founder from graduating from one stage to the other as the business expediency requires. A lot of Business Names for example morph to limited liability companies when they are ready to entertain investor funds. If you choose this approach, you need not worry about someone else using your Business Name before you morph to a Company structure. Your intellectual property rights in the Business Name is protected from the time of your successful registration. Consequently, no one can lawfully use your approved business name as a registered Company name without your prior authorization.
This post is intended to provide general information on this topic. Specialist advice should be sought on your specific circumstance.
By Ayo Adeyemo
Mr. Ayo Adeyemo is an Associate with a leading Law Firm in Victoria Island, Lagos.