There are various forms by which business may be carried out in pursuit of a vision, set of objectives, and/or profit. Different legal entities exist to accommodate diverse business structures, which may be established by two or more persons as well as a single individual. Business structures in Nigeria include sole proprietorship, partnership, limited liability company, limited by guarantee company, and unlimited company.
The focus of this article is the different options available under Nigerian law for a single individual to carry on business. The discourse examines the position before the Companies and Allied Matters Act, 2020(the CAMA 2020 or the Act), wherein the only options available for such an individual were the sole proprietorship and business name frameworks. It then considers the inception of the provision for single-member companies and highlights its implications.
One of the paramount objectives for the enactment of the CAMA 2020 was to promote ease of doing business and foster a more conducive environment for micro, small and medium enterprises
Sole proprietorship
With sole proprietorship simpliciter, one person exerts complete control over a business operation, owns all its assets, and assumes unlimited liability for its debts. The structure allows for business to be carried on with a lower capital threshold for the establishment, reduced reporting responsibilities, fewer technicalities in formation, flexibility in the change of business objects, and informal administration.
The simplicity and benefits of a sole proprietorship make it a popular option for freelancers, self-employed individuals, and entrepreneurs seeking an easy entry point for their endeavours.
However, it is also characterised by the personal liability of the business owner for the business debts and a lack of perpetual succession given that the business may be suspended in the absence of the owner and is likely to end upon the owner’s demise.
Another notable drawback of this business structure is the limited access to capital for expansion through loans and external funding; it is harder for a sole proprietor to access funds as many investors are more inclined to invest in and deal with businesses with legal personality.
Business name
Where an individual-owned business wishes to operate by a trading name consisting of words other than the surname and forenames (or their initials) of the business owner, the law mandates that the name be registered with the Corporate Affairs Commission (CAC) as a business name.
Although the registration of a business name does not confer legal personality, that is, the business cannot sue and be sued in its name or recognised as a legal person, it bestows recognised priority on the use of the name. This means that a registered business name is protected from parallel registration of that name or similar names either as a corporate name, business name, or trademark.
Incorporated company
The governing legislation for corporate establishment is the CAMA 2020 which repealed the Companies and Allied Matters Act, 1990 (the Repealed Act). Under the Repealed Act, the construct of a company-mandated the involvement of at least 2 legal persons.
However, with the enactment of the CAMA 2020, a single individual may form and incorporate a private limited liability company and still enjoy the benefits of incorporation, that is, having a distinct legal personality, power to hold land, and having perpetual succession.
The distinguishing features of an incorporated company also include regulatory oversight, procedures and compliance obligations, and separate incidents of taxation. Unlike companies incorporated in Nigeria which are subject to companies’ income tax (CIT) administered by the Federal Inland Revenue Service (FIRS), sole proprietors are not liable to pay corporate income tax, rather such an individual is to pay Personal Income Tax (PIT) in his/her state of residence pursuant to the Personal Income Tax Act (PITA) which deals with the taxation of individuals.
However, the PITA also provides for the taxation of corporation soles, a concept that arguably covers single-member companies, and to that extent, it would appear the same is subject to PIT. However, although, the definition of a company under the Companies Income Tax Act (CITA) which deals with the taxation of companies excludes a corporation sole, it remains to be seen if the current position will not be altered given that companies are typically answerable to the FIRS.
One of the paramount objectives for the enactment of the CAMA 2020 was to promote ease of doing business and foster a more conducive environment for micro, small and medium enterprises (MSME) innovation and growth.
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The importance of achieving said objective was increasingly imperative considering Nigeria’s ranking in the World Bank’s Doing Business 2020 at 131 out of 190 economies surveyed and in light of the Federal Government’s stance that MSMEs contribute about 50% of Nigeria’s Gross Domestic Product (GDP).
Moreso, according to a survey by the National Bureau of Statistics (NBS), 97.1% of MSMEs ownership structure is a sole proprietorship or individual-owned, thus the expansion of options on individual-owned business ownership structure is a welcome innovation.
This novel introduction of CAMA 2020 enables business owners who presently operate under other business structures indicated above to register as companies or otherwise alter their entities without the need to bring in other persons as co-owners with them as a precondition for incorporation. Moreso, it will afford such business owners the added advantage of exploring increased access to credit while enjoying the option of limiting their liability.
Conclusion
In conclusion, the choice of the appropriate business structure is a crucial decision prerequisite to the commencement of a business. Relevant considerations such as the purpose of the business, availability of capital, taxation requirements, cost of setting up the structure, degree of personal liability, mechanics of control and membership, possible licensing prerequisites, the registration process as well as the inherent post-registration compliance requirements associated with the business are key factors that influence such a decision.
While individual-owned businesses can operate as either sole proprietorship or business name, the benefits of incorporation now exist for individuals to utilise for their commercial operations.
Joboson is an Associate with the Enterprise Team at the law firm, Olaniwun Ajayi LP and specialises in the provision of regulatory compliance and general legal advisory services to clients in a variety of industries.
