What Are the Benefits of a Proper Legal Structure for Your Business in Nigeria?
Legal structuring is the best option for you if you want to achieve long-term high growth, establish a scalable business, and benefit from lower personal liability. Amongst others, a structured business will achieve:
- Easy access to loans, grants, and investors
- Continuity of business beyond one’s life span
- Ease in business administration.
- Separation of personal finances from business finances.
- Recognition of a business as a body corporate, i.e., a legal person separate from the owner.
- Protection of the owner from business risks and liability.
- Exclusive rights to corporate names.
- Access to a qualitative and skilled workforce.
Choosing a Legal Structure in Nigeria
First, let’s cover the rules that govern choosing the best legal structure for your business. The Companies and Allied Matters Act, 2020 (CAMA 2020), governs how your company is structured and the Corporate Affairs Commission (CAC) serves as its regulating body.
Depending on the type of business you’re into, you might also deal with these other regulatory authorities:
- Securities and Exchange Commission (SEC). This is the Nigerian capital market’s apex regulatory body. It regulates, manages, and develops the Nigerian capital market. The Investment and Securities Act of 2007 (ISA) established it.
- Central Bank of Nigeria (CBN) The CBN Act established it to be the foremost financial institution and financial regulator in Nigeria. It also carries out functions imposed on it by the Banks and Other Financial Institutions Act 2020 (BOFIA 2020).
- Nigerian Investment Promotion Commission (NIPC) It is a Federal Government Agency established to encourage, promote, and coordinate investments in Nigeria. The NIPC Act established it.
- Federal Inland Revenue Service (FIRS) It is saddled with the responsibility of tax registration, payment of stamp duties, issuance of tax clearance certificates and tax forms. The FIRS Act established it.
- Small and Medium Enterprises Development Agency of Nigeria (SMEDAN). The SMEDAN Act mandates it to develop the micro, small and medium enterprises in Nigeria.
With the authorities out-of-the-way, let’s discuss how you might categorise your business.
The Common Types of Business Structure in Nigeria
Your business can be structured as:
- A business name
- A company
- A Sole Proprietorship
- A partnership
- An Incorporated Trustee
Let’s discuss each:
A name or title under which a person, or other legal entity, trades.
Any individual, firm, or corporation carrying on business under a business name is required to register within 28 days of commencing the business. The business must have an address for its operations in Nigeria.
The business name is eligible for registration where
- With individuals, firms, or partnerships, the name does not include their first name and surname or their initials. This means that, where a firm carries on business under a name that is not the
- proprietor’s/partner’s surname;
- Full names or surnames with initials
the chosen name becomes registrable.
- For corporations, a name used to carry on business that differs from the registered name of the company is registrable.
The business name does not need to be registered under the following circumstances:
- There is a recent addition to the business name that shows they carry on the business in succession to a former business. You can show this by adding “(under new management)” to the existing name.
- There is an addition of “s” to the partners’ names just to show plurality.
- Where a manager/receiver appointed by the court carries the business on. You can show this by adding “(in receivership)”
- Addition of “& sons” to the business name.
- A business name coined from the mixed surname and forename of partners. For example, where a business is owned by Sandra White and Adesina McCarthy, if they coin their business name, Sandra McCarthy Enterprises, it becomes registrable.
The Advantages of Business Name
- Simplicity of registration
- It shows the true identity of the business owners
- Uncomplicated management
- Less formality in administration
- Easy dissolution
- It protects the business name from parallel registration as a corporate name.
A legal entity formed by a group of people to run a business.
This is the most common business structure, with profit maximisation as its primary goal. It is preferential because of the structured administration.
A company gains a separate legal identity and can operate independently of its shareholders upon formation.
When you form your company, your key formation documents are the Memorandum of Association (MoA) and the Articles of Association (AoA), a.k.a. MemArt.
The MoA includes:
- business objects for which the company exists;
- details of the shareholders, who are also referred to as members of the company; +
- the extent to which shareholders have subscribed to the company.
The AoA establishes the company’s governing corporate administration guidelines.
When you register your company, The MemArt, acts as a deed between;
- the company, its members and officers;
- the members and officers.
As part of your company’s formation, your company will be one of:
- A private company limited by shares (Ltd): Its membership is restricted to 2–50 members and their liability is limited to the shares they hold.
- A public company limited by shares (PLC): Its membership is without limit, with a minimum of two members. The public is allowed to subscribe to its shareholding and their liability is limited to their shareholding.
- An Unlimited Company (Ultd): Its members’ financial liability upon the winding up of the company is unlimited unlike limited companies.
- A company limited by guarantee (Ltd by Gte): This form of company has no shareholders but guarantors. The guarantors “guarantee” to pay a particular amount of money upon the winding up of the company.
I know what you’re thinking:
Yes—you can convert between each category of company type.
Before we move on, let’s discuss another company type that doesn’t fit neatly with those.
Can Foreign Companies operate in Nigeria?
A foreign company can be defined as a company incorporated outside Nigeria and intending to do business in Nigeria. If your business or company falls under this category, you must take all the steps to be incorporated as a separate entity in Nigeria.
You cannot conduct business or perform any act incidental to that except for activities related to preliminary incorporation matters. There is an exception to this rule. This is where the company is exempted by:
- A Company Act preceding CAMA 2020
- A treaty that Nigeria is a party to
The foreign company can be exempt if it falls into any of these categories:
- A foreign company invited by or with the approval of the Federal Government to execute any specified individual project.
- A foreign company in Nigeria for the execution of projects on behalf of a donor country or international organisation.
- A foreign government-owned company engaged in export promotion.
- Any engineering and technical consultants/experts working on a single specialised project under contract with the Nigerian government or its agencies, be it federal or state.
- Any engineering and technical consultants/experts working on a single specialised project awarded by anyone with the Federal Government’s approval.
The Corporate Affairs Commission may cancel this exemption if it is determined that
- it violates CAMA 2020;
- it violates the exemption order restrictions; or
- for any other good/sufficient reason.
After incorporation, as a foreign company to carry on business in Nigeria. You must:
- Get a business permit from the Department of Citizenship and Business, Ministry of Interior.
- Register with the relevant agencies.
- Get Certificate of Capital Importation for equity or loans brought into the country for the business
- Get special licences where the business requires them.
- If you also intend to employ expatriates, an application for an expatriate quota would be necessary.
- Get residence permits known as the CERPAC (Combined Expatriate Residence Permit and Alien Card) for employed expatriates or foreign bank signatories.
- Get an export certificate if you intend to export goods out of the country.
The Advantages of Companies
- Liability is limited
- Perpetual existence of company where desired
- Professional and efficient management
- For manufacturers, economies of large scale production
- The company has a separate legal personality,i.e. It is a person in the eyes of the law, totally separate from the owner.
- More credibility and trust from clients
If you’re thinking, “What if I want a legal personality but I want to handle the administration of my business alone?” This is where sole proprietorship comes into play.
A sole proprietorship, also referred to as a “one-man business”, can be registered as either a small private company or a business name.
As a small private company, it will be exempt from some provisions of CAMA pertaining to companies. This includes the quorum for meetings and the adjournment of meetings.
To qualify as a small company, it must meet the following criteria:
- It must not have a foreign shareholder;
- Its director must hold no less than 51% of its shares;
- None of its members should be government agents or nominee;
- The turnover should not exceed N120 million;
- Its net asset value is not more than N60 million.
You can refer to the paragraph where Business Name was defined above.
Companies like Ebay and Dangote Group started out as sole proprietorships.
The Advantages of Sole Proprietorship
- Easy Setup
- Low cost of registration
- Ease of administration
- No profit sharing
- Encourages a slow and steady growth
When two or more people pool their resources to start a business and decide to share the risks, rewards, and losses, they have formed a partnership. CAMA divides partnerships into two types:
- Limited Liability Partnership
- Limited Partnership
Limited Liability Partnership (LLP)
A LLP is recognised as a body corporate with perpetual succession under CAMA 2020. It is a legal entity separate from the partners.
It should have at least two partners, and one must be a resident in Nigeria. You can also form a partnership with a corporate body.
The rights, duties, and obligations are in the partnership agreement. The partnership agreement is to be filed with CAC. If there is no agreement, the fifteenth schedule of CAMA will apply.
It has these features:
- It can sue and be sued in its own name.
- It can acquire, own, hold, develop, or dispose of property, whether movable, immovable, or tangible and intangible.
- If it chooses, it can have a common seal.
- All acts that are permissible for a body corporate can be done.
A LLP consists only of limited partners. They all take part in the management. It involves pooling the resources of partners while reducing the cost of business, which will increase the capacity for growth.
Unless otherwise stated in the partnership agreement, the partners are liable for the acts of each other partner performed on behalf of the firm.
This also applies to foreign LLPs willing to carry on business in Nigeria, except exempted, as I pointed out above.
In countries like the United States of America, professionals such as accountants, architects, lawyers, etc., incorporate their business services as LLP. It is not as popular in Nigeria, except with law firms, because it was only introduced with the new amendment to CAMA in 2020.
Limited Partnership (LP)
It can be a partnership between a minimum of two people. It comprises both general and limited partners.
The general partner is liable for all debts and obligations, while the limited partner’s liability is restricted to and cannot exceed the amount that he invested in the company. The maximum membership is 20 partners.
A limited partner cannot take part in the partnership’s management.
A limited partner can only check the books and examine the state and prospects of the partnership business. He can also offer advice to the partners thereon.
If a limited partner takes part in the partnership’s management, he is liable for all debts and responsibilities as if he were a general partner.
The Advantages of Partnership
- Access to a pool of funds
- Better decision making through collaboration of partners
- Ease of formation
- Pool of experience, skills, and clientele
It is a non-profit organisation formed by a group with the aim of pursuing a common goal.
Incorporated trustees can be formed when two or more people (who will now be trustees) are appointed by a group of people.
The group should be united by custom, religion, kinship, or nationality. Any association of people formed for the following purposes can also appoint the trustees:
- Social Development;
- any charitable purpose.
- An infant
- A person found by a court to be of unsound mind
- An undischarged bankrupt
- A person convicted of an Offence involving fraud or dishonesty within 5 years of his proposed appointment
They can only apply the income and property of such a body or association towards the promotion of the objects set out in its constitution. They can’t transfer it to any of the other association members. This does not include
- Remuneration of employed staff (CAMA prevents the governing body/council members from being employed by the body).
- Repayment of out-of-pocket expenses, reasonable fees for services rendered by council members.
- Rent for property in use.
An incorporated trustee can operate without registration, unlike companies and business names, but won’t be able to take advantage of the incidences of incorporation.
Its constitution must pledge to:
- prohibit distribution of profit to its members;
- transfer assets to another organisation with similar objects if it becomes dissolved.
It applies to:
- Alma mater unions
- Churches/Religious bodies
- Town associations
- Social/cultural clubs
- Professional associations, e.g., the Nigerian Medical Association and the Nigerian Bar Association.
Key Advantages of Incorporated Trustees
- Ease of executing commercial contracts
- Legal Personality
- Ability to implement the constitution of the Incorporated Trustee
Now that you know all the structure your business can have, let’s take the first step:
How to Choose a Name for Your Business
In Nigeria, the choice of corporate names is modulated by the CAC. Before you can incorporate your business, you must reserve the name.
They can reject a reserved name on several grounds. To prevent delays in the process, the CAC recommends that you submit two names for reservation. If the names don’t meet their criteria, they will be rejected.
Here are some reasons they might reject your name:
- Restricted names The commission can only approve these names if you make a special application. They can also be reserved for a certain type of company. CAMA lists these as:
- Names that include the words Federal, National, Regional, State, Government, or any other name which can imply that the business is affiliated with the Government;
- Names which contain the words “Municipal” or “Chartered” which suggest or are calculated to suggest a connection with any municipality or other local authority
- Names that contain the words “chamber of commerce” unless it is a company limited by guarantee.
- Names that contain the word “cooperative” or its equivalent in any other language or any abbreviation or the words “building society”
- The word “group or holding” is only approved on two grounds.
- There are other sister companies that are to be substantial shareholders of the new company.
- Evidence of other registered companies which are to become subsidiaries of the “holding” company
- Prohibited names. These are names that
- can mislead as to the nature or extent of its activities;
- is undesirable, offensive or otherwise contrary to public policy.
- Is identical with a name already registered or resembles that name deceitfully. CAC will only consider conflicting or identical names where the company or LLP is being dissolved and signifies its consent in the required manner.
- violates any existing trademark or business name registered in Nigeria unless they have got the consent of the owner of the trademark or business name.
- Capable of misleading as to the nature or extent of its activities or is undesirable, offensive or otherwise contrary to public policy.
CAC will approve your choice of name where it meets all the laid down standards above. Where you intend to make use of a restricted name, you can seek approval by paying a stipulated fee for the application.
Doing business in Nigeria is now significantly easier. CAC (Corporate Affairs Commission) and other regulatory authorities continue the on-going effort to improve the simplicity of registration, compliance, and post-incorporation—on par with global business standards.
In this guide, we addressed the details of questions on business structuring in Nigeria. You can use the CAC company registration portal to register a business, although the process can be daunting. It is best to hire and seek the advice of an expert when structuring your business to ensure that you are making the right choice for your business.
An expert will also help avoid technicalities and complications to ensure full compliance with all regulatory bodies both before and after incorporation.
If you have questions, we’re happy to help. Book a time with our Counseal experts.