Business Name VS Limited Liability Company: How Should I Register My Business With CAC?Faith Obafemi
Answer: After validating a business idea, the very next step should be formalizing its existence by registering it with the appropriate authority. In Nigeria, the Corporate Affairs Commission (CAC) is saddled with this responsibility. There are different vehicles under which a business idea could be structured. Section 21 of the Companies and Allied Matters Act (CAMA) lists several options. But we will focus on two major options; Business Name and Limited Liability Company. The points below will help you in answering the question.
Type of Business Idea
Deciding between a business name and a limited liability company depends on the business idea. Some businesses, like law firms, can only be registered as a business name. In the same way, some businesses like those into FinTech can only be registered as a company.
If you do not intend to secure venture capital, that is bringing in investors, you can go ahead with a business name. If otherwise, then you need to register a company so you can issue equity to investors.
Businesses hoping to secure external funding like grants, whether from the government or private should consider registering as a limited liability company. Generally, and in most cases, grants are not given to an individual, but rather to a formal entity reflecting the cause for which the grant was granted.
If you do not intend bidding for projects with the government, whether federal, state or local, you can go ahead with a business name. If otherwise, then you need to register a company. Government agencies will not acknowledge the bids unless it is a limited liability company.
Business names work best for a sole proprietorship. So, if you are running a one-man or one-woman business, and you simply want to structure things in order to get access to benefits like a corporate account, then a business name suffices. If you opt for a company, you must comply with the mandatory requirement of a minimum of two (2) shareholders. Although, there can be more than one proprietor for a business name registration, so it is suitable even for partnerships. However, once there are more than twenty (20) partners, then it needs to be registered as a company. Exceptions include law firms and accounting firms.
Contributions and Ownership Stakes
Business partners who want their contribution to the business to be clearly spelled out in public documents and also reflect their ownership stakes are better off registering as a company. As earlier stated, although business partners could still register as a business name, there must be a legal document that clearly addresses these points.
Separate Legal Entity
With a business name, there is no separate legal entity. You (and your business partners) are simply carrying on business in the name registered with CAC. This means that all risks and liabilities are borne personally by the business owner(s). With limited liability companies, whether private or public, there is a separate legal entity. That is, the company itself is an artificial person that is distinct from the shareholders/members. Thus, all risks and liabilities are borne by the company and not personally by the shareholders.
A business name lacks continuity because when the owner dies, the business also dies. This is not the case with companies as it is a separate legal entity existing independent of its shareholders/members. Moreover, ownership of shares can be transferred, while ownership of a business name cannot be transferred as it is not a separate legal entity.
This follows immediately after separate legal entity, because only a person, artificial or natural can own properties in Nigeria. What this means is that a business name cannot buy properties nor own shares. A limited liability company can own properties, take up shares in another company and also own a business name.
Capacity to Sue or Be Sued
Business names cannot sue or be sued. The individual(s) behind them are the ones who can sue or be sued. Companies can sue or be sued, without involving the shareholders/members. This is however subject to the principle of lifting the veil, especially when criminal matters are involved.
Formality and Costs
Registering a business name is less formal and does not require much documentation. Ideally, just the application form, receipts and IDs. business owners can register a business name themselves, saving on costs. A limited liability company is more formal, both during registration and even when in operation. Things like annual general meetings, board resolutions, etc are some of the mandatory formalities. A lawyer is needed to register a company, this means more costs.
Financial Bill 2020
The recent financial bill grants tax concessions to companies with annual profits below ₦25 million. This concession does not apply to business names.
Finally, if you choose to register as a company, you also need to decide on private or public. If private, you need to check CAC guidelines for the minimum share capital allowed for your type of business. Also, only a maximum of 50 shareholders are allowed in a private company, otherwise it needs to be registered as a public company instead.
We hope the above points will help you in deciding on an appropriate structure for your business idea. Do not make the mistake of opting for the cheapest option (a business name) when it does not adequately reflect the nature and risks of your business idea. It could become an expensive mistake.
Simply consult a lawyer to check out all of these and help you make an informed decision.
DISCLAIMER: This article is written for educational purposes only and should not be construed as legal advice. Consult a lawyer for tailored legal advice.