Of all the decisions you make when starting your business, possibly the most important one is the type of legal structure you select for your business, nay the organizational structure. Before I proceed, business legal structures differ significantly from country to country. However, for this article reference is only to business legal structures within Nigeria.
Notably, the decision you make in choosing your organizational structure will not only have an impact on the kind of tax you pay but all your mode of doing business, and the liability you will face in the event of any legal issue. Also, while it’s possible to change your business legal structure at a later day, it can be a rigorous and expensive procedure.
Thus, it’s paramount to conduct your research properly before making that single decision.
The most common forms of businesses in Nigeria are the sole proprietorship, partnership, and corporation. The requirement for the registration of these forms of business differs. While you require the service of a legal practitioner to register a corporation, you can actually do without them in registering a sole proprietorship business.
Further, the primary law governing businesses in Nigeria is the Company and Allied Matters Act, alias CAMA. It basically makes provision for the various kinds of business organizational structures – the proprietorship, partnership, and corporation. The process for their registration and operation is governed by this same CAMA. Importantly, the same CAMA established the Nigerian Corporate Affairs Commission which is the umbrella body charged with the day to day implementation of the provisions of the Act.
For the purposes of this article, let me focus on the business of the day.
Business Organizational Structures In Nigeria.
1. The Sole Proprietorship:
The sole proprietorship is the simplest and most popular form of business ownership. This form of organizational structure is designed for a small business owned and managed by one individual. The sole proprietorship is the easiest kind of business for you to explore in your quest for an interesting career. In this form of business, the sole proprietor is the only owner and ultimate decision-maker for the business. It has no legal distinction between the sole proprietor status as an individual and his or her status as a business owner. The simplicity and ease of formation make the sole proprietorship the most popular form of ownership in Nigeria.
Further, the sole proprietorship is also the most common form of business practiced all over the world. It is found in every facet of business such as agriculture, mining, shoes making, wholesaling, retailing, warehousing, transportation, health care, etc.
The major advantage of a sole proprietorship is that it is the simplest and least expensive structure. This form of business is cheap to register. The registration can be done with the Corporate Affairs Commission (CAC)). For registration of this kind of business, contact our team via WhatsApp: 09015226474 And also, the owner only pays personal income tax in his state of residence.
To end with, this form of business can only be registered by Nigerian residents.
Another option for organizing a business is to form a partnership. A partnership is a legal form of business with two or more owners.
In this form of organizational structure partners legally share the business assets, liabilities, and profits according to the terms of a partnership agreement. The law does not require a written partnership agreement, but it is wise to have a written agreement that documents the status, rights, and responsibilities of each partner.
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The partnership agreement is a document that states all of the terms of operating the partnership for the protection of each partner involved. Banks often want to review the partnership agreement before lending the business money. A partnership agreement can include any legal terms the partner’s desire.
Further, Partnership can be regarded as an improvement on sole proprietorship form of business organization, the minimum number of people that can form a partnership is two, while the maximum is twenty, with the exception of partnerships comprising professionals; for example, lawyers, accountants, doctors, to mention just a few.
Notably, partnership is divided into two; limited and general partnership.
While in a general partnership, all owners share in operating the business and in assuming liability for the business’ debts; that’s profit and loss are shared equally, in limited partnership, only one partner has control of the operations of the business while the other person (s) contributes money to receive only part of the profits. Thus, partners are limited to the amount of their investment.
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Corporations are registered companies under the CAMA. It’s a more complex and expensive form of business organizational structure to run. This is probably due to the fact that corporations are distinct legal personalities separate from its owner.
In law, corporations are known as juristic persons. Thus, can sue and be sued in its registered name, and mandated by law to pay tax. Also, this form of business cannot be registered by a single individual as obtainable in a sole proprietorship. It must be two adults who are 18 years and above. Notwithstanding, there is an exception to this general rule.
One of the huge benefits of running a corporation is the protection against liability it offers to its owners. That is to say that the company’s debt is not that of its owners.
The organizational structure of this form of business, however, comes with a number of downsides. A remarkable one is higher costs.
More importantly, a corporation may be formed either as a Private Limited Liability Company or Public Limited Liability Company (PLC).
Types Of Companies In Nigeria
a. Company Limited By Shares:
A company is said to be limited by shares if the liability of its members is limited by the memorandum to the amount if any unpaid on the shares respectively held by them. And this kind of company can be a private or a public limited liability company.
Basically, the idea of a company limited by share is that the members of the company cannot be personally liable for debt or liabilities owed by the company. This is due to the fact that a company is regarded as a distinct personality.
A company limited by share capital must be registered with the Corporate Affairs Commission (CAC) and the company’s articles filed with the CAC as required by CAMA. Further, a company of this nature for its formation must comprise of a minimum of 2 members and a maximum of 50 members for a private company and an unlimited number of members for a public company.
b. Company Limited By Guarantee:
Companies registered as limited by guarantee are mostly for non-profit purposes. That’s NGOs. Thus, a company is said to be limited by guarantee if the memorandum to such amount as the members may respectively thereby undertake to contribute to the assets of the company in the event of its being wound up. These are organizations incorporated solely to promote religious, educational, sports, charitable purposes, etc.
A company limited by guarantee doesn’t carry on business for the purpose of making a profit. The money gotten from running this not distributed to its members or trustee but rather, kept for the upkeep of the organization.
Interestingly, when registering a company of this nature, like Orphanage homes, etc, it shall not be registered with a share capital.
c. Unlimited Company:
A company is said to be unlimited company when the members do not have any limit on the liability of its members. The debt of the company is the debt of its members.
From a legal perception, this kind of company is not advisable an enterprise.
In Nigeria, only a few companies operate this kind of business. Mobil Producing Nigeria Unlimited is a renowned one.
Conclusively, the decision you make in choosing your organizational structure will not only have an impact on the kind of tax you pay but all your mode of doing business, and the liability you will face in the event of any legal issue. Thus, it’s pertinent to make the right choice from the onset of your entrepreneurial journey.