You could be in trouble if you’re not following your company’s business structure correctly. The proper business structure can help increase efficiency and growth while reducing risk. You don’t have to be an expert on business structure to figure it out, though—the process is simple enough to follow if you take the time to learn about it. Let’s look at the different types of companies and how they work so that you can make the most of your company setting.
Choosing the best Business Structure in Nigeria
Different types of businesses have other methods of working. Public companies offer stockholders the opportunity to purchase shares in the company and receive dividends (a type of payout). Entrepreneurs create and run their businesses, typically in private companies. Many nonprofit organizations are private companies but offer their members a service or program rather than owning the company.
Starting a business in Nigeria or anywhere in the world takes consistent effort. The process requires intense research, paperwork etc. The interested party needs to take rigorous steps for the business’s success during the initial stage.
Business structure affects taxes, operations, and personal liability. The best business structure balances legal safeguards and benefits. The arrangement can also boost revenue and lower taxes.
To avoid unwanted conversions, you must thoroughly analyse your options and make an informed selection.
Companies and Allied Matters Act (CAMA) regulates Nigerian company registration and other business entities. The act governs Nigerian company incorporation, registration, and management. It also governs financial reporting and corporate governance for these entities. The CAC enforces the CAMA Act.
Types of Companies in Nigeria
There are 4 different kinds of companies in Nigeria. They are:
Private Limited Company by Shares:
Its members limit their liability to the amount they owe on the shares they own.
This is the most common structure, and most small businesses use it so they can grow.
Do Understand that:
- One person can only set up a private company.
- Articles of Association of a private limited company must specify that its shares can’t be sold to just anyone.
- It does not sell its shares to the public at large.
- The company’s name must end with “Limited” or “Ltd.”
Public company limited by shares:
Any business that is not a private company is a public company. Here, the Members limit their liability by the number of unpaid shares they own, so their liability is equal to the number of unpaid shares they own. Large businesses with a lot of capital that wants to raise money regularly often choose this company.
Do understand that:
- It can ask the public to buy its shares.
- There is no limit to how many people can join, but there must be at least two.
- It must say that it is a public corporation in its Memorandum of Association.
- The Articles of Association do not say that members can’t sell or give away their shares.
- The name of the company must end with “Plc.”
Company limited by guarantee:
In a company limited by guarantee, the members limit their liability to the amount guaranteed to be contributed in the case of winding up or insolvency. In other words, the members of a company are only responsible for the debts of the company up to the amount they agreed to pay. This type of company is mainly used by organisations that don’t make money, like clubs, sports leagues, non-governmental organisations (NGOs), and charities.
You need to understand that:
- It doesn’t have any shareholders or share capital. Its members stand behind it.
- The company members agree to contribute a small amount, which must be at least #10,000 if the company has to be shut down or goes bankrupt.
- It runs businesses, but the money it makes can’t be given to its members. Instead, it can only be used to further its goals.
- The Attorney General must agree for a company limited by guarantee to be formed.
- The company name must end with “Ltd/Gte” or “Limited by Guarantee.”
Unlimited Liability Companies:
The members of this type of company can be held financially responsible for anything that goes wrong. Most of the time, its members are responsible for the debts and liabilities that the company has.
Some essential traits are:
- Members’ assets can be sold to pay off the company’s debts if its obligations are more than its assets.
- The company’s name must end with “Unlimited” or “UNLTD.”
Partnerships Business in Nigeria
In Nigeria, a partnership business is a business structure in which two or more people operate a firm jointly and share its earnings and losses. The following are some of the essential characteristics of Nigerian partnership businesses:
- Shared ownership: Partners in a partnership business share ownership and are jointly liable for the business’s debts and liabilities.
- Partners have a say in the operation’s management, and a majority vote typically determines decisions.
- Shared earnings and losses: Partners share in the profits and losses of the business by their agreement.
- Partners in a partnership business are personally liable for the debts and obligations of the company, meaning their assets may be utilised to settle business debts.
- A partnership can be dissolved if one of the partners dies, retires, or becomes incapacitated or if all partners agree to dissolve the firm.
- The absence of an independent legal body means that partners are personally responsible for the debts and liabilities of a partnership business.
- There is no share capital in a partnership, and partners do not own shares in the business.
- Not required to register with CAC: Unlike corporations, partnership businesses are not required to register with the Corporate Affairs Commission (CAC).
Sole proprietorship
is the most fundamental business structure. Since it is not a formal entity like a corporation, the owner lacks legal and financial independence from the business. One individual owns, controls, manages, and accepts all of the company’s risks and is entitled to all its profits and losses.
- It has no independent legal personality. Financially and legally, the owner and the business are the same. Hence it cannot sue or be sued under its registered name.
- It is owned and operated by a single individual who makes all company decisions. The proprietor has total control over the business.
- The owner’s liability is infinite. Therefore, the owner will be held personally accountable if the business cannot pay its bills or weaknesses.
- The owner assumes all risk and receives all profits.
- The business may cease to exist in the event of the owner’s demise, incarceration, or personal bankruptcy.
Incorporated Trustees
Incorporated Trustees may be formed by a single person or a group of individuals who share common cultural and religious ties. Charitable, social, cultural, educational, sporting, and developmental organisations are common examples. Trust companies are commonly set up by places of worship, social groups, non-governmental organisations, etc.
- One or more people come together to build it.
- It has no business activities and no profit sharing. The money made can only be used to further the organisation’s goals.
- Unlike the trustees, who have their own identities under the law, members do not.
- The phrase “Incorporated Trustees Of” must come first in the name.
Conclusion: When choosing a business structure, some factors to consider are the amount of liability you wish to bear, how you would like to raise capital, how much control you want over your business, and the cost of registration and set-up. Additionally, it is essential to contact experienced legal professionals or tax specialists to make the best choice.
Last Updated on 5 months by Jaja Abiola