So, you’ve decided to start your own legal company.
Deciding on your business’s legal structure is one of the most important steps of a startup process. Your choice will have a major impact on company liability, taxes, control, and a host of other factors.
Understandably, this can make new business owners a little stressed out. You certainly don’t want to make the wrong choice. Before we get to pick the right business structure.
Let’s talk about company incorporation.
What’s company incorporation?
According to Investopedia incorporation is the legal process used to form a corporate entity or company. A corporation is the resulting legal entity that separates the firm’s assets and income from its owners and investors. In other words, Incorporation is the way that a business is formally organized and officially brought into existence.
When it comes to Nigeria company registration, the process is quite straightforward, and entrepreneurs or investors can set up their businesses or their brands in Nigeria through the Corporate Affairs Commission (CAC) which was established by the Companies and Allied Matters Act.
The CAC is saddled with the responsibility of registering companies in Nigeria. The said registration is a must for company formation in Nigeria if you want to run a legal business here.
Registering or incorporating your business is a smart and rewarding choice for you for several reasons, such as;
- Your business reputation and prestige will be high. And by law, your registered business is a separate legal entity. This means (your company) has the rights and privileges of a human person i.e can own properties.
- Incorporating your business reduces your liability and risks. The extent of your liability is limited to the number of shares you hold in the company.
- With your legal business, you can seek investors and raise money for your business.
There are other benefits to incorporating your business such as effective management, perpetual succession, debt financing, and most importantly legal protection.
Back to our business structure, how do you pick the right one? The Nigerian government through CAC recognized the following business entities
- A company limited by shares (private or public)
- A company limited by guarantee (private or public)
- An unlimited liability company (private or public)
- Business Name (Sole Proprietorship or Partnership)
- Incorporated Trustees (Non-profit or charitable organisation)
And of recent
- Limited liability Partnership (LLP)
- Limited Partnership (LP)
The Corporate Affairs Commission recognizes the above different types of business entities, but the average small business in Nigeria chooses between a sole proprietorship and a company limited by shares.
I guess the question now is – Which business entity is right for you?
Let’s begin with the common one
BUSINESS NAME – SOLE PROPRIETORSHIP/PARTNERSHIP
Business Name (BN) is the simplest, most common business entity among entrepreneurs. Registering your start-up under the Business Name is the fastest and cheapest means of doing so. As the name suggests, this simply means registering the name of your business.
This is mainly to differentiate it from other entities and give your business a corporate outlook. It does not confer any legal personality on the business name.
BN Business Entity can be registered with just one proprietor known as Sole Proprietorship or with two or more partners known as partnership
Sole Proprietorship is a business model wherein one person is singularly responsible for running the company. He or she is in charge of all of the business’ profits and debts.
Essentially, you are your business: the startup is registered in your name, the control is in your hands and you are accountable to no one but yourself. With Sole Proprietorship, your start-up also benefits from being exempt from corporate tax payments, and there are few formal business requirements.
This type of business entity is best suited for small and medium enterprises (SMEs). If you plan on working alone, especially for a lengthy period, then it’s a great option. However, there are a few disadvantages to a Sole Proprietorship business entity.
PARTNERSHIP ENTITY
A partnership entity or structure allows a business to be owned by two or more persons. Here, all partners actively manage the business and share in the profits and losses. With two owners, A partnership business allows for dual status as Sole Proprietorship.
What this means is that the business is registered under both partners’ names, and they each have equal rights and responsibilities. Partnership simply put is Sole Proprietorship, with more than one proprietor. All partners are personally responsible for financial issues such as debt and lawsuits.
A Partnership entity allows for business decisions to be made by majority vote rather than relying on one person.
After registering your business, it is still possible to convert the company to a different entity at a later stage. For this reason, you shouldn’t be overly stressed about your initial decision, so long as it is in line with your long-term goals. Subscribe to our Newsletter to get notified when we update this content with other business entities.