ISSUES TO CONSIDER IN CHOICE OF BUSINESS ENTITY FOR DOING BUSINESS IN NIGERIA

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1 ISSUES TO CONSIDER IN CHOICE OF BUSINESS ENTITY FOR DOING BUSINESS IN NIGERIA By By Oluwatobi Oyesanya (Esq) (Senior Associate) INTRODUCTION The term business entity in this paper loosely refers to the choice of business identity that a businessman or businessmen choose to give to their business; its the kind of legal life that the business owner(s) choose to infuse their business with at inception; or the kind of perception which the business owner(s) wish to portray to the public about their business. Nigeria is a country that operates a free market economy and the only restrictions and regulations in place by law are those which are generally necessary in the national interest such as restriction of the participation of aliens under Immigration (Amendment) Act , Nigerian Investment Promotion Commission(NIPC) Act and Foreign Exchange (Monitoring & Miscellaneous) Act Government intervention and monopoly are generally not encouraged. The 1999 Constitution (as amended) 4 provides that The State shall, within the context of the ideals and objectives for which provisions are made in this constitution (d) without prejudice to the right of any person to participate in areas of the economy within the major sector of the economy, protect the right of every citizen to engage in any economic activities outside the major sectors of the economy. 5 1 Cap. I1, Laws of the Federation of Nigeria, Cap. N117, Laws of the Federation of Nigeria, Cap. F34, Laws of the Federation of Nigeria, Cap. C23, Cap. N117, Laws of the Federation of Nigeria, Section 16(1)(d) of the Constitution of the Federation of Nigeria (as amended). Page 1

2 DOING BUSINESS IN NIGERIA The two major business entities by which businesses can be registered in Nigeria are i) Business Names for sole proprietorships and partnerships; and ii) Limited Liability Companies. 6 The provisions of Part A and Part B of the Companies and Allied Matters Act are clear in the formal requirements for the formation of any of the said vehicles. Also note that foreign companies or enterprises with alien participation are required to create a body under the Companies and Allied Matters Act, before they can conduct business in Nigeria. The main Administrative and Regulatory agencies of government for businesses are the Corporate Affairs Commission (CAC) 8 and the Securities and Exchange Commission (SEC). 9 Others include the Immigration Service, 10 the Central Bank of Nigeria, 11 Nigerian Investment Promotion Commission 12 etc. which have their respective functions in restricting and regulating businesses. 6 Part A and Part B of the Companies and Allied Matters Act, (CAMA) Cap. C20, Laws of the Federation of Nigeria, Established under the Companies and Allied Matters Act, Established under the Investments and Securities Act, Established under the Immigration (Amendment) Act, Established under the Central Bank of Nigeria Act, Cap C4 Laws of the Federation of Nigeria, Section 4, NIPC Act, Cap. N117, Laws of the Federation of Nigeria, Page 2

3 REGISTERED BUSINESS NAMES A business name is simply an alias of the business owner. It s the name by which the business owner is also known as. Such a business entity is in fact and at law the same person as the owner(s). It does not enjoy separate legal existence nor can it own property. It is also neither capable of suing or being sued to court nor does it enjoy perpetual succession. As of right, any citizen of Nigeria can carry out business in his own name without any need for registration. However, some sole businessowners prefer to be identified by a registered business name rather than their biological names. This is generally due to the belief that it breeds a sense of corporate packaging, unique identity and product sellability. There are certain benefits that go with doing business as a natural person or with an alias. These benefits include: i) Lower cost of setting up. The filing fee in most jurisdictions is usually cheaper for registering this business entity. ii) Lower organisational cost as there are fewer functional departments to manage and fund. iii) Lower tax liability when compared to limited liability companies. Generally, there is no federal tax payable by this kind of corporate vehicle except the Withholding Tax (5%) on certain items like rent and Value Added Tax (5%) chargeable on goods and services rendered. No corporate tax is paid. iv) It is versatile and flexible as several alias can cheaply be created for several business concerns. v) There are fewer legal obligations such as annual returns 13 and there are no statutory meetings or registers required. vi) Corporate banking is still possible. vii) Privacy protection especially for businessmen who don t want their personal names plastered all over marketing materials. viii) Value of services and even products are enhanced by the fancy-ness of the business name of choice. ix) The registered name of the business is protected from use by any other member of the public just like in the case of limited liability companies. Even though in practice there are occasional errors resulting in the registration of similar business names. However, despite the foregoing, a major concern of many business people is that the liability of the business is the personal liability of the business owner(s) just as the business owner(s) takes all the profit in the event of gain. Also, the life of the business depends entirely on the life of the proprietor(s). 13 Section 587 of CAMA, 2004 Page 3

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5 LIMITED LIABILITY COMPANIES Limited liability companies are generally a type of business entity which adorn the shareholders and directors with a veil of incorporation. The decision of the House of Lords in Salomon v. Salomon & Co. Ltd. 14 is an authority on this principle. Limited liabilitycompanies exist as a distinct legal personality separate in fact and in principle from the personality of the shareholders and directors. This business entity is rather attractive to various classes of businessmen for the following reasons: i) Independent corporate existence theoutstanding feature of a company is its independent corporate existence. 15 ii) Limited liability limitationof liability is another major advantage of incorporation. The company, being a separate entity, leading its own business life, the members are not liable for its debts. In the event of any debts, the liability of members is limited by shares; each member is bound to pay the nominal value of shares held by them and his liability ends there. 16 iii) Perpetual succession Anincorporated company never dies on account of the death of its owners. Shareholders may come and go, but the company will go on forever. In K/9 Meat Supplies (Guildford) Ltd. 17,during the war all the members of a private company, while in general meeting, were killed by a bomb. But the company survived, not even a hydrogen bomb could have destroyed it. However, under the CAMA, a Company may be wound up which effectively terminates its existence. iv) Common seal Sincea company has no physical existence, it must act through its agents 18 and all such contracts entered into by such agents must be under the seal of the company. The common seal acts as the official seal of the company. 19 v) Transferable shares CAMA provides that the shares or other interest of any member shall be property transferable in the manner provided by the articles of association of the company. 20 vi) Separate property- The property of an incorporated company is vested in the corporate body. The company is capable of holding and enjoying property in its own name. No members, not even all the members, can claim ownership of any asset of company s assets. vii) Capacity for suits Acompany can sue and be sued in its own name. The names of managerial members need not be pleaded. viii) Professional management-a company is capable of attracting professional managers AC Principle as enunciated in Salomon v. Salomon (supra) 16 See Section 21 (1) of CAMA, Re, 1966 (3) All E.R. 320, 18 Section 63 and 64 of CAMA, Section 74 of CAMA, Section 115 of CAMA, Page 5

6 However, there are some shortcomings of this type of business entity; a) Lifting of corporate veil thoughfor all purposes of law a company is regarded as a separate entity it is sometimes necessary to look at the persons behind the corporate veil. This arises usually in cases of fraud 21 or breach of statutory duty 22 b) Formalities and expense Incorporationis quiteexpensive as compared to registration of business names. It requires a number of formalities to be complied with both as to the formation and administration of affairs. c) Tax Liability - The rate of tax is 30% of net profit for all businesses except agricultural and manufacturing companies which are required to pay 20% tax on profit. 23 d) Audit- A company is legally required to have its accounts audited annually by a chartered accountant, whereas the accounts of the partnership are audited at the discretion of its members. Alternatively, a statement of affairs of the company may be prepared and filed by the company secretary for filing at the Corporate Affairs Commission (CAC). CONCLUSION Business owners should realise that the choice of an appropriate business entity is a legal decision as much as it is a business decision. Expert opinion should be sought accordingly.although cost is a major factor that businessmen seek to keep low at all times and registering a cheaper form of business makes sense prima facie, this choice must not be made to the detriment of losing the benefits limited liability companies offer. 21 See Re: F.G. (Films) Ltd (1953) 1 WLR Section 93, 246 (3) and 506 of CAMA, Under the Companies Income Tax Act, Page 6