Introduction
Choosing the right legal structure for your organization is essential for its overall effectiveness and success. The Companies and Allied Matters Act, 2020 (CAMA), which regulates the registration of entities in Nigeria, provides four options: business name, company, partnership, and incorporated trustee. It is important to understand the different organizational structures, their nuances, and the potential impact it can have on your business. By understanding these factors, stakeholders can make informed decisions that align with their organizational objectives. This article explores the various forms of organizations that can be registered in Nigeria, both for business and non-profit purposes.
Business Name
A business name is the simplest form of business ownership in Nigeria,[1] with the owner referred to as the “proprietor”. It does not grant a separate legal personality to the business and is best suited for small companies where the owner has full control. The proprietor is personally liable for all taxes, debts, and liabilities incurred by the business. A business name may be reregistered as a company therefore, you may choose to register a business name at the early stages of your business and later transition to a company as your business expands.
Partnership
Partnerships are suitable for businesses managed by two or more individuals who share in the profits and losses
of the business. In Nigeria, a partnership can be registered as a limited partnership (LP)[2] or limited liability
partnership (LLP).[3]
A LP is required to have a minimum of two partners and a maximum of twenty partners,[4] who may be general or limited partners. LPs require at least one general partner who is involved in the day to day running of the business.[5] The distinguishing factor between a general and a limited partner is that while general partners have unlimited liability for all debts and obligations of the partnership, the liability of limited partners is limited to the sums contributed or agreed to be contributed at the time of joining the partnership.[6]
LLPs on the other hand have separate personality from its partners and enjoy limited liability to the extent of their respective contributions, except in cases of fraud.[7] For eligibility, an LLP must have a minimum of two partners[8] however, there is no prescribed maximum number of partners. Also, every LLP must have at least two designated partners who are responsible for ensuring compliance with the provisions of the CAMA.[9] In this wise, an LLP enjoys similar benefits as a company, and is sometimes referred to as a hybrid business structure that combines the features of a partnership and a corporation.[10] Also, LLPs do not pay corporate taxes, and is commonly used by professionals such as lawyers, accountants, and consultants.
Company
A company is a business entity that has a separate personality from its owners.[11] A company may be registered as a company limited by shares, either private or public, unlimited company or a company limited by guarantee.[12]
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- Company limited by shares: for a company limited by shares, the liability of each owner, known as shareholders, is limited to the amount unpaid (if any) on their shares.[13] As a result, the personal assets of shareholders cannot be used to settle debts or liabilities arising from the business. A company limited by shares is suitable for medium to large businesses as it allows for distinct personality from owners, and flexibility in management (i.e., the management of a company may be different from the shareholders).
A company limited by shares may be a private limited liability company (“Ltd”) or a public limited liability company (“PLC”).[14] A PLC can raise funds by way of public offerings and may have as many shareholders as it deems fit provided, it has minimum of two shareholders.[15] Hence, PLCs are more suited for businesses looking to be listed on the public stock exchange (i.e. the Nigerian Exchange limited). A Ltd company on the other hand cannot invite the general public to subscribe to its shares[16] however, it may have one (1) to fifty (50) shareholders.[17]
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- Unlimited Company: In an unlimited company, shareholders have unlimited liability and may be personally liable for the debts and liabilities of the company. An unlimited company is usually less attractive to investors given the unlimited risk exposure. [18]
- Company Limited by Guarantee: Unlike the other types of companies that are registered with the primary purpose of making profit, a company limited by guarantee (“Ltd/Gte”) has a more charitable purpose which includes the promotion of commerce, art, science, religion, sports, culture, education, research, charity, or other similar objects.[19] Although a Ltd/Gte can undertake business activities, all its income and resources must be applied solely towards the promotion of its object. Hence, a Ltd/Gte is not allowed to distribute profits to its members.[20] The liability of each member of a Ltd/Gte is limited to the amount agreed to be contributed in the event that the company is wound up.[21] Ltd/Gte is best suited for educational institutions and non-profit organisations.
Incorporated Trustees
An incorporated trustee (“IT”) is a non- profit organization registered by appointed trustees. The objectives of ITs are usually religious, educational, literary, scientific, social, developmental, cultural, sporting, or charitable.[22] Therefore, IT is best suited for non-profit organisations, associations, clubs, and social or religious groups. Like Ltd/Gte, the income and resources of an IT must be applied to its objectives.[23] However, unlike a Ltd/Gte, an IT cannot engage in business activities instead it raises funds from grants, levies, donations, or other charitable means.
Conclusion
By utilizing the information provided, you can carefully consider your organization’s unique needs, goals, and structure. Making the right decision regarding the appropriate entity early on in your business will position your organization for growth while minimizing risks, ensuring compliance with regulations, and effectively managing tax obligations.
Authors: Ifeoma Ezeribe and Tolulope Oguntade
Footnotes
[1] Section 814 of CAMA.
[2] Section 795 of CAMA
[3] Section 746 of CAMA
[4] Section 795(2) of CAMA
[5] Section 795(3) of CAMA
[6] Section 795 (4) 0f CAMA
[7] Section 746, Section 765, Section 766 and Section 769 of CAMA
[8] Section 748 of CAMA
[9] Section 749 of CAMA
[10] [10] Section 756 of CAMA
[11] Section 42 of CAMA
[12] Section 21 of CAMA
[13] Section 21(1) (a) and Section 117 (4) (c) of CAMA
[14] Section 21 (2) of CAMA
[15] Section 18(1) and Section 118 of CAMA. While the minimum number of shareholders for a public company is two (2), there is no maximum limit to the number of shareholders a public company can have.
[16] See Section 22 (5) of CAMA
[17] Section 18(2) of CAMA
[18] Section 117 (4) of CAMA
[19] Section 26 (1) of CAMA
[20] Section 26 (3) of CAMA
[21] Section 117 (4) (d) of CAMA
[22] Section 823 of CAMA
[23] Section 838 of CAMA