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How to Choose the Best Legal Structure for your Business

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Last revision: September 18, 2020
Last revision:
Category: Business Structure
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Organizations are established for various purposes, such as for the provision of goods or services, for philanthropic causes, and other valid reasons involving profit-making. Starting a business can be a difficult task as the founder is required to take complex steps and adhere to the various regulatory compliance.

The issue of the type of business structure, the purpose of the business, the organization or management, recruitment of staff, and other important factors should be considered. However, the first thing to take into account is the type of business structure the owner wants to operate because choosing the wrong structure may have severe legal implications on the business.

In Nigeria, depending on the nature of business a person wants to operate, a business may be registered as a company, business name, or incorporated trustee at the Corporate Affairs Commission (CAC).

A. 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.

Essential Characteristics of a Company

1. 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.

2. 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.

3. 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 of the company.

4. Perpetual Succession

A 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.

5. Capacity to Sue and be Sued

A 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.

6. Company Seal

A company is a corporate entity that is distinct from its members. It executes its contracts through the board of directors of the company. A contract entered into by a company should be executed either by affixing the common seal of the company or by deed.

Types of Companies

Companies are divided into four main categories namely:

1. 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. This means 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 usually small, and only one person can incorporate a private company.

- The Articles of Association of the 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.

2. Public Company Limited by Shares

The liability of the members is also limited by the unpaid shares the shareholders hold in the company, which also means 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 the 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.

3. 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 it has members who act as guarantors.

- The members of the company give an undertaken to contribute a nominal amount (not less than N100,000) in the event of the winding up of the company.

- The company may engage in business, but unlike other types of companies, 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. However, if the consent of the Attorney General can not be obtained, the Corporate Affairs Commission can assent to the application.

- 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.

4. Unlimited Liability Companies

An unlimited liability company is a company whose members are generally liable for the debts and liabilities accrued by the company, which means that there are no restrictions 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 as there is no extent of their liability. The name of the company must end with "Unlimited" or "UNLTD".

B. 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.

I. 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.

Essential Features of a Partnership

1. 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.

2. 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.

3. 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.

4. 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.

5. Decision making

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

II. 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.

Essential Features of a Sole Proprietorship

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

C. 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.

Common Features of an Incorporated Trustee

1. 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".

2. 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.

3. Separate Legal Personality

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

About the Author

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

Templates and examples to download in Word and PDF formats

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