Doing business is a phrase commonly used to depict a relevant economic activity in any society and also includes all the intricacies and challenges associated with such an activity, from inception to operation and where time bound, dissolution.
Nigeria, like any other country in the world has laws and guidelines that govern the registration and operation of businesses. The principal legislation for these, is the Company and Allied Matters Act, CAP C20 Laws of the Federation 2004 (or “CAMA”, as its popularly known).
Before we move on to discuss the relevant provisions of the law, there are certain considerations you should be aware of if you are looking to start a business.
Issues for Considerations Prior to Registration
- The Business
It is not only necessary but crucial that you know and to the extent possible, understand the type of business you want to do before you commence the registration process. This helps in determining the right registration vehicle to use.
You may wonder why the emphasis on the type of business. Simply put, knowing your particular business idea (or the main business idea where you are considering doing a few things) will help in ascertaining the best vehicle for registration. So, what do you want to do? Do you want to run a Web Design business, Digital Marketing, Copywriting, Investment Advisory, Project Management or a host of other business ideas (we will provide information on possible business ideas in subsequent posts).
- The Nature of the Business
The proposed business idea must be one that is registrable. This means your proposed business idea must be:
- Legal – This is a given but you never know what people may come up with. There have been cases where the proposed business may be allowed in another country but not in Nigeria.
- In line with Public Policy – these are rules and guidelines generally set out by administrative/executive government in accordance with current laws. They are usually more fluid in nature and are likely to be modified as society evolves.
- Free of restrictions and prohibitions, or where necessary, appropriate approvals must be sought and obtained. This is the case in the manufacture or sale of ammunition which is a highly restricted for security and policy reasons.
Do note that certain businesses can only be registered in a particular way or are better if registered that way. For instance, law firms are not registered as companies because of the nature of the services provided. It is one of the exceptions stated under section 19 of CAMA.
- Types of Registration
Under our Nigerian company law, there are different vehicles for registration of businesses, these are described under Part A – C of CAMA. We have highlighted the registration mechanisms in this post and will provide an in depth analysis of each one in subsequent posts:
- Registration(incorporation) under Part A
This provides for the registration of a company. A company is a legal entity incorporated by two or more people for commercial and/or other related purposes. In broad terms, there are three different types of companies:
Any of these three types may either be private or public. The most popular option is the Company Limited by Shares.
A company limited by shares is one where the liability of the members(shareholders) are limited to the amount unpaid on the shares allotted to them.
- Registration under Part B
This part is generally referred to as registration of business names. It is perhaps the most common registration option for small and medium scale enterprises (SMEs).
- Registration under Part C
Another option for registration is the registration under Part C, which provides for the registration of incorporated trustees. This is different from the other registration options as it is applicable to not for profit ventures such as foundations & charities, religious organizations, non governmental institutions amongst others.
According to information presented on the Corporate Affairs Commission(CAC) website http://new.cac.gov.ng/home/resources/ (the Commission regulating registration and operation of businesses in Nigeria), from January – September 2015 there were:
- 54,587 companies incorporated,
- 34,774 business name registrations
- 6,809 incorporated trustees.
Other Relevant Considerations
There are also other issues to consider in determining the type of business vehicle, including the following:
- Initial Capital Outlay: generally, the registration of a company involves more capital outlay than that of a business name. This is because the company will usually have a share capital (except an unlimited company) and registration costs are also higher.
- Proposed Size of Business – Are you looking to run a one-man business or scale up? For instance, if you are looking to run a side gig along with your main job, a business name registration may be a better option. Start out as a sole proprietor, if you then decide to do this full time or grow exponentially, it may be time to re-register as a company.
- Liability of Members – with most options for business name registrations (sole proprietorship and partnership), the liability of the owners are usually unlimited, this means that any liability accruing to the business could be extended to the owner. However, some state governments have established variations to liability provisions for partnerships such as the introduction of limited liability partnership and limited partnership under the Partnership Law of Lagos State 2009
- Disclosure Requirements/Obligations – there are more disclosure requirements for company compared to business name registrations. This includes the filings required at the CAC amongst others. Where you will prefer a higher level of privacy, registration under Part B may work better.
- Ease of Registration – In addition to reduced costs, Business Name registrations are generally easier to register than companies. The list of documents required are usually less.
- Statutory or Professional Restrictions – there are certain businesses which need to be registered in a particular form based on the nature of services or products provided. A clear example is financial institutions which are generally required to be incorporated as companies under the applicable Central Bank of Nigeria laws and Securities & Exchange Commission laws.
- Access to external funds (Debt and Equity)- Research has shown that people looking to start a business usually approach family and friends for capital before they move to other parties. However, where you are looking for capital (whether debt or equity) beyond your immediate circle, there are certain expectations.
Generally, investors and lenders will prefer a more formal entity such as a company. One major reason is that a company is an independent entity that can exist exclusive of its owners, which means the stake of the owner (shareholder) can be sold or transferred between parties. It is usually difficult to quantify this with Business Name registrations.
Furthermore, it is relevant to note that beyond the registration of the business there may be other laws that govern such a business. This may be dependent on the location of the business or the sector. For instance, investment advisers looking to advice members of the public are required to register with the Securities and Exchange Commission. Same goes for insurance brokers who are also required to register with the National Insurance Commission and those looking to delve into the oil & gas who have to be mindful of the provisions of Nigerian Oil and Gas Industry Content Development Act 2010.
We would always suggest that before you commence with the registration process, you should ascertain if there are other rules that will affect your proposed business. Your lawyer can assist with this process. We have had clients that incorporated companies with a certain share capital only to realize that the law governing that area provides for a minimum share capital, which was higher than their share capital. We will look at some of these sectoral laws in subsequent articles.
Over the years, we have had clients use the phrases business name (registration under Part B) and company (incorporation under Part A) interchangeably. For the purpose of Nigerian law, these terms are very different and depict different entities. Hopefully, you will not fall into this trap after reading this post and other similar posts.
Legalese with The CLM Practice