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.

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Male Ethnic businessman sitting at table with laptop computer in cafe garden. Nigeria man using laptop, smiling. Nigeria, Africa.

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


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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.