Important decisions are made when starting a business. One of them is the decision to have a business plan that suits your need and another important one is deciding on the right business structure. Choosing the right legal structure for your business is very important as it affects how the organisation is going to be run.
At ReDahlia, we are passionate about SMEs and everything entrepreneurship which is why our mission is to be everything to the entrepreneur. We know it can be very tough to start and succeed in business without a backbone hence we preach what we know and have done.
Like I always say, you don’t have to be carried away with the entrepreneurship craze seen on social media. The main thing is that you are happy doing whatever you’re doing. We are not all called to be entrepreneurs. Just be fulfilled in what you do – whether it is a 9 to 5 or anything else. But if you decide to run your own business, we want you to do it the right way.
Well, you don’t just decide on a business structure, each business structure has its different peculiarities and these factors will determine the level of control, ability to access finance and the general operation of the company.
Therefore, before we proceed to the different types of business structures in Nigeria, I will shield light on the factors to consider before you make your final decision.
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Factors To Consider Before Choosing A Business Structure
It is nice to ask where the company will be in the nearest future. So, go back to the business plan to ensure the goals and objectives are aligned with the type of business structure you choose. The structure should give room for changes and growth and should not limit you.
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The simplest business type is the sole proprietorship in terms of starting it up and operational complexity. It is cheaper to register and report profit and tax as personal income. It is difficult, however, to secure outside funding.
Partnerships, on the other hand, require that you sign an agreement with partners to define profits and roles. The corporation is more complex because it requires complex reporting requirements both at the federal and state levels.
On the surface, a corporation carries the least amount of personal liability, since the law recognizes it as its own entity. What this means is that customers and creditors do not have access to your personal assets but they can sue the corporation.
Partnerships share the liability between the partners as stated in their partnership agreement. The sole proprietor bears all the risks of the company and his personal asset is not separate from the business.
The tax structure is different for each of the business structures. The corporation pays more tax than the sole proprietor since the sole proprietor does not pay the company income tax. However, the new Finance Act by the Federal Government has changed what it used to be. So, the advice of a tax expert should be sort of, for guidance.
See Also: Types of taxes in Nigeria and how they’re administered.
The business structure you choose will impact the level of control you will have in the operation of the business. A sole proprietorship will be the best choice for you if you want to have primary control of the business and its activities.
Control can be negotiated in partnership business structure in the partnership agreement.
A corporation is designed to have a board of directors who make major decisions. However at inception, a single person can control a corporation, but as it grows, the need to operate the corporation as a board-directed entity increases.
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You want to talk to investors, venture capitalists, or take out bank loans then the corporation is your best bet since it is easier to secure outside funding. A corporation can also secure additional funding by selling shares.
The sole proprietor does not enjoy all these benefits and can only obtain funding through personal accounts, personal credits, grants, taking on partners, family, and friends.
Licenses, Permits, And Regulations
There are some businesses that need special licenses, permits, and regulations to operate and therefore, must take on a particular business structure. Please speak to your lawyer for guidance.
Types of Business Structures In Nigeria
The Sole Proprietorship
This is the simplest business structure – one individual owning and operating the business alone. The owner is solely responsible for the company’s liabilities and this places his assets at risk of seizure to satisfy a debt or legal claim filed against him.
Raising financing is more difficult in a sole proprietorship and as a result, one might need to depend on one’s savings, grants, home equity, and family and friends.
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The sole proprietorship is cheap to register (Sole proprietorships may choose to operate under a registered business name which is registered with the Corporate Affairs Commission (CAC)).
Also, the owner only pays personal income tax in his state of residence. For easy business registration, contact ReDahlia Workspaces to get it done. The sole proprietor is responsible for the profits and debts of the company.
This type of business structure is suitable for small or micro businesses and professional businesses (law, accountancy, photography, etc) owned by one person.
For many individuals to own and operate a business, consider structuring the business as a partnership; a general or limited partnership. The partners manage the company and assume responsibility for debts and obligations in a general partnership.
General partners are also found in a limited partnership together with limited partners. However, while the general partners are responsible for the liabilities of the partnership, the limited partners are simply investors and do not engage in the day to day operation of the business and their liability is also limited.
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The cons of partnerships include a partner’s personal liabilities being borne by other partners and each partner can take out loans and make decisions on behalf of the others (if the partnership agreement allows so).
The legal and accounting considerations of the partnership make it more expensive to set up than the sole proprietorship.
Partnerships are ideal for businesses owned by family members or friends; for restaurants, legal agencies, etc. Partners share profits and losses.
Corporations are complex and expensive. They are independent legal entities and comply with more regulations and tax.
The biggest benefit of the corporation is the protection against liability – the organization’s debt is not that of its owners. Raising funds is also more easily done. It can sell stocks and the death of one shareholder cannot cripple the business. One downside is that more tax is paid.
See Also: How to get Tax Identification Number (TIN) and open a bank account for your business in Nigeria.
The incorporated trustee is an arrangement that religious bodies, charities and social entrepreneurs can use. Please speak to a lawyer for advice.
Like I mention at the beginning, there are peculiarities, pros, and cons in each arrangement. The choice you make will greatly affect the way you run your business, impacting everything from taxes and liability, to control over the company.
It’s always best to engage a lawyer for guidance on the most appropriate options to adopt. Discuss with a lawyer and figure out which type of business structure gives your business the most advantages when it comes to helping you achieve your organizational and personal financial goals.
Let’s talk a bit about intellectual property. You may think you do not have any intellectual property to protect. Even before one starts a business or sells the first product or secures the first client, there is already an existing asset.
The very first assets – the name, brand, idea or invention, and logo – should be protected. They can appreciate over time. Not protecting them is very dangerous.
See Also: Different Classes of Trademark in Nigeria
Coca Cola’s brand, if sold today, will be bought with billions of dollars. Likewise, a small business today might have a huge brand name worth huge amounts in the future.
Trademark your brand identity to avoid theft. We can do this for you at ReDahlia. Moreover, An unregistered logo, brand name or product is vulnerable to copying and financial losses. However, If they are protected, then copycats can be sued. Your brand has the potential of becoming big in the future.
Steps On Registering Your Business With CAC
- Decide on a name
- Perform a name availability search at the CAC and reserve it
- Complete the CAC documentation – forms CAC 2, 3, 5, 7, Memorandum and Article of Association for corporations, The documentation for business name registration is limited. If your name suggests professional or specialized services – law, accounting, medicine, engineering, consultancy, etc. – then the documentations must have a copy of a certificate of qualification or evidence of proficiency – bachelors or masters degree certificate, professional qualifications, etc. – from at least one of the directors of the company. We have observed recently that this is no longer a consideration
- Pay the stamp duties
- Submit to CAC for verification and filing
- Expect the original certificate of incorporation and certified true copies of the paid-for CAC documents in a few weeks (7 to 10 working days with ReDahlia)
Let’s create visibility for your brand and put your business on the world map. Contact us today to make your brand the preferred choice for our audience of entrepreneurs and business leaders.
The intent of this article is to provide a general guide to entrepreneurs on the subject matter. Professional advice should be sought about your specific needs.
1 thought on “Factors To Consider Before Choosing A Business Structure”
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