THE LEGAL BUSINESS STRUCTURE FOR STARTUPS IN NIGERIA.

Introduction

Choosing the right legal business structure from the start of a business is one of the most important decisions a business owner must make. It does not only put the business and its owner{s} in the right direction but also informs the owner on the many regulatory hurdles such a business or startup must scale through.

Every legal business structure comes with its various legal responsibilities and liabilities. Such legal responsibilities and liabilities range from the filing of tax returns, obtaining the necessary business licenses or permits, compliance with the various Code of Corporate Governance for the effective and efficient running of such a business or company, data protection compliance, the paperwork involved in setting up such a business endeavor. Not only this but the business owner is also informed of the various advantages and disadvantages which are accrued to each of these business structures and?as well as how legally to take advantage and avoid the disadvantages.

For instance, there are various legal means by which a company can avoid tax payments through the various tax incentives and reliefs provided by the tax statutes.

However, it must be noted that this does not come without securing the service of professionals, such as legal practitioners, accountants, auditors, etc.

The establishment and running of business must be in accordance with the provisions of the laws and as well as the various regulations put in place by the relevant regulatory bodies of such sector or subsector of an economy.??It, therefore, becomes necessary for a founder of a startup to be abreast of the legal structures put in place by our laws for carrying out business in Nigeria.

The Legal Business structures for startups in Nigeria.

It must be noted from the umpteenth time of this short piece that, there are various legal business structures provided under the law which a startup may undertake. The such legal business structure includes:

A. Sole proprietorship

B. ?Partnership

C. ?Company.

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However, before we briefly discuss the above business structures put in place by the law, it must be noted that a startup granted a label outside the company business structure can only exist for six months. This is because, a startup in a partnership or sole proprietorship in the business structure must convert to a company failure of which, such a startup’s license would be withdrawn.

A.??Sole Proprietorship.

A sole proprietorship is a business structure where such business is owned, funded, and mostly controlled by a single person or individual and there is no separate legal personality. Under the law, both the business and its owner are one.?

The proprietor of such a business or enterprise bears the full responsibilities and liabilities of running the business. Personal income taxes are paid on profits made from the business.

However, in accordance with the provisions of the Nigerian Startup Act 2022, a startup in a sole proprietorship business structure or nature can only be granted a pre-- label status for a period of six months to enable such a startup to convert to a limited liability company.

B. Partnership.

A partnership legal business structure is an arrangement between two or more legal parties or individuals for the establishment and management of a business or enterprise with the aim of making a profit. A partnership can take different forms or types as provided under our law.

Partnerships can be general partnerships, limited partnerships, and limited liability partnerships.

This in turn would be briefly discussed as there are separate legal liabilities or consequences attached to each of them under the law.

i. General Partnership: This is a type of partnership where all the parties to the partnership arrangements share both legal and financial liability on an equal basis. Partners in general partnership share the cost of running such a business from their private pockets and as well as share profit on an equal basis.

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ii. Limited Partnership: Limited partnerships have been described as a hybrid of general partnerships and limited liability partnerships. At least one partner must be a general partner, with full personal liability for the partnership's debts. At least one other is a silent partner whose liability is limited to the amount invested. This silent partner generally does not participate in the management or day-to-day operation of the partnership business.

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iii. Limited Liability Partnership: Limited Liabilities Partnership is a body corporate with a legal entity separate from the partners. It has been described as a common structure for Professionals such as Lawyers, Architects, and Accountants. This is a recent creation of business law and it can be found under section 746 of the Companies and Allied Matters Act 2020.

C.??Company

A company is a legal entity formed by legal individuals to carry out a business or purpose of doing a business. However, a company can as well be formed not for making a profit but for the promotion of arts, education, sports, etc. A company limited by guarantee comes under fits in perfectly here.

It must be noted that there are different forms of companies under our law but we would only focus our attention on Limited Liability Companies which is the only type of company a Startup can undertake under the Nigerian Startup Act 2022.

A limited liability company is a type of company where the liabilities of members are limited by the number of shares held in the company which has not been paid for or by guarantee by the amount to be contributed to the assets of the company in the event of its being wound up.

As can be seen in the above definition, a limited liability company can be a company limited by shares or limited by guarantee.

It, therefore, becomes necessary to submit that a company limited by shares can be a private or public company as we have it under the provisions of Companies and Allied Matters Act 2020.

However, this writer does not intend to delve into the in-depth features of a public company limited by share and a private company as this is not within the purview of this article.

It is advisable that a startup should register as a private company. This is even more advisable as single individuals can now incorporate a private company under our law. This would even do away with the pre-label of a startup in a proprietorship or partnership business structure which can only be in existence for six months and such a startup must register as a limited liability company.

Conclusion

In conclusion, it is advisable that founders of startups must know the legal business structure which their start-up will undertake and the attendant consequences of such business structure. This would not only put the founders of startups in the right direction but also inform them of the many regulatory hurdles such a startup must scale through.

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Timothy Olamide is an NYSC Associate at Platinum and Taylor Hill LP and can be contacted via [email protected] ?Or ?08144856315