TYPES OF BUSINESS ENTITIES IN NIGERIA

Nigeria, being one of Africa's largest economies, offers a diverse array of business structures to accommodate various commercial activities. The primary legislation governing business entities in Nigeria is the Companies and Allied Matters Act (CAMA) 2020, which introduced significant reforms to modernize and streamline business registration and operations. The Corporate Affairs Commission (CAC) is the government agency in charge of entity formation in Nigeria.

Below are the main types of business entities in Nigeria, together with their features and advantages:

1. Sole Proprietorship

Definition: A sole proprietorship is the simplest form of business entity owned and managed by a single individual.

Key Features:

• Ownership: Single owner who has complete control over all business decisions.
• Liability: The owner has unlimited personal liability for the debts and obligations of the business.
• Taxation: Income is taxed as the personal income of the owner.
• Formation: Requires minimal formalities, often just registration of the business name with the Corporate Affairs Commission (CAC).

Advantages:

• Easy and inexpensive to establish and operate.
• The owner retains all profits and makes all decisions.
• Minimal regulatory compliance requirements.

Suitability: Ideal for small-scale businesses and startups with low risk and little capital requirements. It is not suitable for a large or foreign-owned entity.

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2. Partnership

Partnerships involve two or more individuals or entities conducting business together. There are three main types of partnerships.

a. General Partnership

Definition: A business owned by two or more persons who share profits, losses, and management responsibilities.

Key Features:

• Ownership: Partners contribute capital, skills, or labour.
• Liability: Partners have unlimited joint and several liabilities for the partnership's debts.
• Taxation: Profits are taxed as the personal income of the partners.
• Formation: Requires a partnership agreement (though not mandatory) and registration of the business name with the CAC.

Advantages:

• Combined skills, resources, and expertise of partners.
• Shared decision-making and responsibilities.
• Relatively simple and cost-effective to establish.

b. Limited Partnership (LP)

Definition: A partnership consisting of at least one general partner with unlimited liability and one or more limited partners with liability limited to their investment.

Key Features:

• General Partner: Manages the business and has unlimited liability.
• Limited Partners: Contribute capital but do not participate in management.
• Liability: Limited partners' liability is restricted to their capital contribution.
• Formation: Requires registration with the CAC and adherence to specific statutory requirements.

Advantages:

• Attracts investors who prefer limited liability.
• The general partner retains control over management.
• Flexibility in profit-sharing arrangements.

c. Limited Liability Partnership (LLP)

Definition: A hybrid business entity combining features of partnerships and companies, where all partners have limited liability.

Key Features:

• Separate Legal Entity: LLPs have legal personalities distinct from their partners.
• Liability: Partners are not personally liable for the LLP's debts beyond their capital contributions.
• Management: Partners can participate in management without affecting their liability status.
• Formation: Requires incorporation with the CAC under CAMA 2020.

Advantages:

• Limited liability protection for all partners.
• Flexibility in internal structure and management.
• Perpetual succession independent of changes in partnership.
• It is open to foreigners, as foreigners can join in its formation

Suitability: Suitable for professional firms and businesses seeking partnership flexibility with limited liability protection.

3. Companies

Companies in Nigeria are categorized based on liability, size, and whether they are public or private.

a. Private Limited Company (Ltd)

Definition: A company owned by private shareholders with liability limited to their shares.

Key Features:

• Ownership: Minimum of one shareholder (per CAMA 2020) and a maximum of 50.
• Liability: Shareholders' liability is limited to their shares paid for.
• Transfer of Shares: Restricted; cannot publicly offer shares.
• Management: Managed by a board of directors; a minimum of one director is required for a small company, while at least two directors are required for a foreign-owned entity.
• Secretary: Secretaries are only required for large and foreign-owned companies, and a smaller company does not need to appoint a secretary.
• Formation: Requires incorporation with the CAC, memorandum, and articles of association.

Advantages:

• Limited liability protects personal assets.
• Easier to raise capital than sole proprietorships and partnerships.
• Perpetual succession ensures business continuity.

Suitability: Ideal for small to medium-sized enterprises seeking limited liability and potential for growth. It is also the most suitable form of entity for a foreign-owned company.

b. Public Limited Company (PLC)

Definition: A company whose shares can be offered to the public and traded on a stock exchange.

Key Features:

• Ownership: Minimum of two shareholders; no maximum limit.
• Liability: Shareholders' liability is limited to their shareholding.
• Shares: Can invite the public to subscribe to its shares and debentures.
• Management: Managed by a board of directors; a minimum of two directors is required. If the company intends to raise funds from the capital market, a minimum of five directors comprising at least three independent directors will be required.
• Secretary: The appointment of a secretary is mandatory.
• Formation: Requires higher minimum share capital and compliance with stricter regulatory requirements.

Advantages:

• Ability to raise substantial capital through public offerings.
• Enhanced corporate image and credibility.
• Shares are freely transferable, providing liquidity to investors.

Suitability: Suitable for large businesses seeking to raise capital from the public and expand operations.

c. Company Limited by Guarantee

Definition: A company formed for non-profit purposes, where members' liability is limited to the amount they undertake to contribute in the event of winding up.

Key Features:

• Purpose: Typically used for charitable, educational, or cultural activities.
• Liability: Members guarantee to contribute a nominal amount upon dissolution.
• Profit Distribution: Prohibited from distributing profits to members; profits must be reinvested.
• Formation: Requires consent of the Attorney General of the Federation to set up

Advantages:

• Limited liability for members to the extent of the undertaking.
• Suitable legal structure for non-profit organizations.
• Perpetual succession ensures continuity of purpose.

Suitability: Ideal for NGOs, charities, and non-profit entities focusing on social objectives.

d. Unlimited Company

Definition: A company where members have unlimited liability for the company's debts and obligations.

Key Features:

• Liability: Members are fully liable for debts if the company's assets are insufficient.
• Privacy: Not mandated to file annual financial statements with the CAC, offering privacy.
• Formation: Incorporation with the CAC, similar to other companies.

Advantages:

• Greater privacy in financial affairs.
• Flexibility in capital structure and operations.

Suitability: Rarely used; may be suitable for specific professional practices where privacy is paramount.

Conclusion

Choosing the appropriate business entity in Nigeria depends on factors such as the nature and scale of the business, capital requirements, liability considerations, and long-term objectives. Entrepreneurs and investors should carefully assess each option and may benefit from professional legal and financial advice to ensure compliance with Nigerian laws and regulations.

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By Corporate & Commercial Law Team at?Resolution Law Firm

Email:?[email protected]

Tel/WhatsApp:?+2348099223322