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How to Choose the Best Legal Structure for your Business

Last revision:
Last revision: May 13, 2019
Last revision:
Category: Business Structure

People make decisions to establish organizations for various purposes, such as, provision of goods and/or services, for philanthropic reasons, etc. most of which is ultimately for profit making. Starting a business can be a daunting task as it is a process that requires care and diligence. The new business owner must first understand the various business structures and identify the most suitable one for their business because choosing the wrong structure may have severe legal implications on the business.

In Nigeria, an organization, depending on the nature of its business, may be registered as a company, business name or incorporated trustee at the Corporate Affairs Commission (CAC).

1. Companies

A company is a legal entity which consists of an association of persons (whether natural and/or juristic persons) for the purpose of carrying on business.

A. Essential Characteristics of a Company

Separate Legal Personality

Upon incorporation, a company becomes separate and distinct from its members. It is a separate legal entity that can sue and be sued in its corporate name. It has its own seal and its assets, rights and liabilities are separate and distinct from its members. It is capable of incurring debts, borrowing money, entering legal contracts, etc.

Separate Property/Asset

As a separate legal entity, the company can hold property or assets in its own name. Examples of properties or assets a company can have include land, building, personal properties, intellectual property, shares, etc.

Management of the Company

Being an artificial entity and not having a physical presence, the company acts through its board of directors. The members or shareholders of the company as the case may be, are not involved in the management/day to day running of the company.

According to the Companies and Allied Matters Act, 2004, every company must have at least two directors and two members.

Perpetual Succession

The company can not cease to exist except it is wound up. The membership of the company may change but the company will remain except it is wound up.

Capacity to Sue and be Sued

The company like a person, can sue and be sued in its own corporate name because the company though an artificial entity, has a separate legal entity.

The Company Seal

The company is a corporate entity and has the ability of executing contracts through its board of directors. Such contracts must be under the seal of the company. There are two types of company seals namely: Common seal and official seal. In executing contracts entered into by companies, the seal must be affixed on the document and either two directors or one director and company secretary (who are the officers of the company) are required to sign contracts on behalf of the company.

B. Types of Companies

Companies are divided into four main categories namely:

Private Company Limited by Shares

This is the most common type of company. The liability of the members is limited by the unpaid shares the shareholders hold in the company. What this means is that in the event of winding up, the members are only liable to pay such amount of unpaid shares (if any).

The common features of this type of company are as follows:

- The membership of the company is between 2-50 members i.e the members of this company can not exceed 50.

- The articles of association of this company must restrict the transfer of shares of the members of the company.

- It does not offer its shares to the members of the public.

- The name of the company must end with "Limited" or "Ltd".

This type of company is usually a preferred choice for small or family businesses and start-ups with a view to expanding in the future.

Public Company Limited by Shares

The liability of the members is also limited by the unpaid shares the shareholders hold in the company. What this means is that in the event of winding up, the members are only liable to pay such amount of unpaid shares (if any).

This is similar to the private company limited by shares however, the following distinguishes it from a private limited liability company:

- The public company limited by shares can invite the members of the public to subscribe to its shares (that is, it may be listed on the Nigerian Stock Exchange).

- There is no limit to the membership of the company, i.e the members of the company must be at least two but has no maximum.

- The articles of association of this company does not restrict the transfer of shares of the members of the company.

- The name of the company must end with "PLC".

This type of company is usually a preferred choice for large or expanding businesses.

Company Limited by Guarantee

A company limited by guarantee is an alternative type of company used mainly as a non-profit organization. The members of the company are only responsible for the debts of the company to the extent of the amount they have undertaken to contribute.

The major features of this type of company are as follows:

- The company does not have share capital or shareholders but instead has members who act as guarantors.

- The members of the company give an undertaken to contribute a nominal amount (not less than N10,000) in the event of the winding up of the company.

- The company may engage in business but unlike other types of company, the profit from the business can not be distributed to its members as dividends, rather it can only be utilized for the promotion of its objects.

- The consent of the Attorney General is required for the incorporation of a company limited by guarantee.

- The name of the company must end with "LTD/GTE" or "Limited by Guarantee".

The most common uses of this type of company are clubs, membership organizations, sports associations, Non Governmental Organizations (NGOs), charitable organizations etc.

Unlimited Liability Companies

An unlimited liability company is a company where the members are generally liable for the debts and liabilities accrued by the company, i.e, there is no restriction on the liability of the members of the company.

Consequently, members of an unlimited liability company will be held responsible for all the debts of the company until the debts are fully paid and there is no extent of their liability. The name of the company must end with "Unlimited" or "UNLTD".

C. Documents/Information Required for Company Registration

After deciding on the suitable company for your business, the next step is to register the organization at the CAC. The documents/information required to register a company are as follows:

- Two proposed names of the company for availability check and name reservation.

- The registered office address of the company.

- The object of the company as contained in the company's Memorandum and Articles of Association of the company.

- Particulars of the directors of the company: Particulars such as the names, residential addresses, email addresses, phone numbers and valid means of identification (such as National I.D card, International passport and Driver's licence) of the directors of the company.

- Particulars of the members of the company: Particulars such as the names, residential addresses, email addresses and phone numbers of the members of the company and their shareholding (if applicable).

- The share capital of the company (if applicable).

- If any of the directors are non residents or citizens of Nigeria, the resident permit of such director.

- If either of the directors or shareholders of the company is a company, the certificate of incorporation of that company and a board resolution of the company accepting the appointment as director or approving the allotment of shares as the case may be.

Upon registration at the CAC, a certificate of incorporation containing the registered name of the company, the registered address and the registration number will be issued to the company.

2. Business names

A person can also choose to register its business as a business name at the CAC. There are two types of organizations that can be registered as business name according to the Nigerian law namely: Partnerships and Sole proprietorship businesses.

A. Partnership

A partnership is a business which is formed and owned by two or more persons who share the ownership, profits and losses accruing to the business.

B. Essential Features of a Partnership

Purpose of Partnership

A main purpose of forming a partnership is for profit making. This means that a partnership can not be formed as a not-for-profit organization.

Distribution of Profit and Loss among the Partners

All the partners in a partnership share the profits and losses accruing from the partnership as well as the risks. This is because they all own the business. The Partnership contract need not provide for equal shares as they may share according to the proportion of their contribution or ownership interest depending on the agreement between the partners.

Share of ownership

The partners also share in the ownership of the partnership assets. After the partnership has been dissolved, the assets of the partnership will be distributed to all the partners (after the debts of the partnership has been fully paid off) in accordance with their partnership contract or a Partnership Dissolution Agreement.

Number of Partners

According to the law, a partnership is formed by 2-20 partners. However, the partners may exceed 20 where it is a co-operative society or any partnership for the purpose of carrying out the practice of legal practitioners or accountants.

Decision making

The partners have the right to make decisions affecting the business or the partnership assets.

C. Sole Proprietorship

The sole proprietorship is the simplest form under which a business can operate. It is not a legal entity like a company, it is simply the ownership of a business by one individual who controls, manages, bears all the risks and entitled to all the profits and losses accrued from the business.

D. Essential Features of a Sole Proprietorship

No Separate Legal Personality

In legal terms, the owner and the business are one and the same i.e the business does not have a separate personality from the owner. Unlike a company, the sole proprietorship can not sue and be sued in its registered name.

Ownership and Management of the Business

It is owned and managed by only one person who makes all the decisions for the business. Since there is no separate legal identity bestowed on the sole proprietorship, the owner is responsible for all the business activities and transactions and has complete control of the business.

Liability

Since there is no separate legal personality, the liability of the owner is unlimited, i.e, limitless. Consequently, if the business is unable to pay its debts or liabilities, the owner will be personally liable for all the debts. For example, the owner may be required to sell his personal property/assets such as cars, buildings and other properties until the debts have been fully paid off.

Risk and Profit

The owner is the one and only risk bearer in a sole proprietorship. Since he is the only one who made financial investment in the business, he is the only one to benefit from the profit, loss as well as bear all the inherent risks in the business.

Continuity

The sole proprietorship depends largely on the owner. The death, imprisonment, bankruptcy, etc. of the owner will ultimately affect the business. Hence, in cases like this, the business may cease to exist.

E. Registration of a Business Name

According to the law, every firm or business name should be registered within 28 days of commencing business. However, a business name may be exempted from registration under the following circumstances:

- In the case of a partnership, if the name of the firm consists only of the surname of all the partners, or their fore names, or initials of such fore names.

For example if Mr. Williams Green and Mr. Crystal Brown decide to form a partnership and they decide to name the partnership "Green and Brown" or Williams Green and Crystal Brown" or W. Green and C. Brown", they are exempted from registering that business under the law.

- In the case of an individual (i.e a sole proprietorship), the name consists only of the surname of the individual only or in addition to the forename or the initials of such forename.

For example if Mr. Williams Green decides to form a sole proprietorship business and he decides to name the business "Green" or "Williams Green" or "W. Green", he is exempted from registering that business under the law.

- In the case of a corporation, the name is consists of the its corporate name.

F. Documents/Information Required for Business Name Registration

The following documents/information are required for the registration of a business name:

- The proposed names of the business for availability check and reservation of name.

- The general nature of the business.

- The address of the principal place of business.

- Where the business is being registered as a partnership or firm, the full names, residential addresses, sex, age, nationality and passport photographs of the partners of the firm.

- Where the business is being registered as a sole proprietorship, the full names, residential addresses, sex, age, nationality and passport photographs of the proprietor.

Upon registration, CAC will issue a certificate of business name registration which will contain the name of the business name, the address and the registration number.

3. Incorporated trustees

Incorporated trustee is an incorporation of a person or community of persons (known as trustees) who are bound together by custom, religion, or by any body, association or persons established for religious, educational, developmental, sporting, scientific, social, cultural or charitable purpose.

Incorporated trustees are usually mosques, churches, clubs, Non Governmental Organizations (NGOs), etc.

A. Common Features of an Incorporated Trustee

Number of Trustees

According to the law, one or more persons can form an incorporated trustee. The name of an incorporated trustee always begins with "Incorporated Trustees of".

Nature of the Organization

Unlike the company limited by guarantee, the incorporated trustee does not do business but like the company limited by guarantee, it does not distribute profits instead, the profits must be applied solely for the promotion of its objects.

Separate Legal Personality

Only the trustees have a separate legal personality. The members of an incorporated trustees do not have a separate legal personality.

B. Documents/Information Required for the Registration of Incorporated Trustee

The following documents/information are required for the registration of an incorporated trustee:

-Written application for the registration of an incorporated trustee signed by the secretary and the chairman.

- CAC/IT FORM 1: Application form completed in triplicate with the full names, residential addresses, occupation and signatures of the trustees of the organization.

- FORM CAC 1 (Incorporated Trustees Availability check and Reservation of Name) containing the proposed name of the organization stated as "Incorporated Trustees of...".

- FORM CAC3 (Notice of Situation Address of the Registered Organization) containing the registered address of the organization.

- 2 copies of the constitution of the applicant organization clearly stating its aims and objectives, duly signed and dated.

- Evidence of ownership of land or an undertaking in lieu to own a land within 2 years of registration.

- Cuts of original newspaper advertisement in 3 national dailies, one being a local newspaper widely circulating in the area where the organization is based, clearly stating and calling for objections to the registration within 28 days.

- 2 passport photographs of each of the trustees.

- Copy pf the extract of the Minutes of Meeting where the trustees were appointed.

-Trustees declaration form duly sworn at the High Court confirming that the trustees are not disqualified from acting as trustees under sections 591-592 of the Companies and Allied Matters Act.

- Any other document of proficiency for professional organization and NGOs.

- Original receipt of prescribed registration fees.

Upon registration, CAC will issue a certificate of registration which will contain the name, address and registration number of the incorporated trustee.

About the Author

Vivian Umelue is an attorney and legal templates programmer at Wonder.Legal and is based in Nigeria.

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