Choosing The Right Business Structure: Sole Proprietorship Verses Limited Liability Company

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Overview

While choosing a business structure in Nigeria as a foreigner, it is necessary to know some of the legal requisites concerning business incorporation. Companies and Allied Matters Act (CAMA) is the main law which governs the formation and operation of companies in Nigeria.

Understanding Sole Proprietorship

Definition and Characteristics

Sole trader is a business entity that is fully owned by one person and managed by this single person and this makes it the most common type of business venture. This type of business is non-incorporated that is why the owner has unlimited liability for business debts and liabilities.

CAMA Regulations

There are few hindrances governing the formation of Sole Proprietorship under CAMA since this form of business structure does not require registration with the CAC unless the business name is different from the owner’s full name.

CAMA section 574: This provides for the operation of business in the owners’ names without incorporation if they do not want to use any other name for the business.

Suitability for Foreigners

There are certain limitations that foreigners experience when registering Sole Proprietorship in Nigeria; the bulk of the business is owned by the owner with no distinction between him and the business. This lack of distinction can put foreign owners at a lot of risk, they may be held to unlimited liability and certain legal immunities may be beyond their reach.

Coming to the knowledge about the Limited Liability Company (LLC)

Definition and Characteristics

An LLC is a relatively more complex form of structure where by the business entity has its own identity different from that of the owners or shareholders. This separation affords commercial risks or debts or any legal proceedings against the asset of the business and the owners have the freedom over personal belongings.

CAMA Regulations

The establishment and control of an LLC in Nigeria is controlled by several sections of the CAMA where companies are made to work under legal framework.

CAMA Section 18: This section provides the legal requirement to the effect that any company doing business in Nigeria, other than a sole trader, must be incorporated under the CAC.

CAMA, Section 27: Lays down the particulars for the registration of the company, and this is by filing a memorandum and articles of association.

Section 78 of CAMA states that any foreign individual planning to incorporate a company in Nigeria has to conform to the following regulations; acquisition of permits, and capital.

Suitability for Foreigners

This is because LLC ensures protection for the investors especially the foreign investors as they seek to conduct their business in a new environment. The legal distinction from the owners reduces owner’s exposure to liability, and brings the following legal rights – the ability to enter into contracts, as well as access to credit facilities.

Comparative Analysis

Risk and Liability

Business debts are fully secured by owners and this may come with lots of dangers; particularly within a foreign country.

LLC: There is limited liability for the total amount invested in the company under the policy, and it provides a good protection for the Foreign Direct Investors.

Ease of Setup

Sole Proprietorship: They are easier and cheaper to establish with little or no legal formalities.

It is more cumbersome to form and is more expensive to form as it has to be done under the provisions of CAMA.

Sources of Financing and Credit

Lack of capital as sources of funding are small amount of money from the owner or small loan from a Third party financier.

The greater access to capital and credit this is because the company can sale shares to the public or approach its financier and borrow large amount of credit.

Consider Long-Term Goals

If your goal is to create a permanent base in Nigeria then the best type of business entity to use is the LLC. Due to these reasons, it can be said that this has protection from the law which is a good dividend for the future investments.

Getting Registration Process Started

If you have concluded on the most appropriate structure that you intend to adopt, the next thing to do is to start the registration process. This is done by contacting the Corporate Affairs Commission (CAC) or a registered agent to assist in the various procedures of registering under CAMA.

Navigating the Registration Process

Understanding CAC Requirements

The Corporate Affairs Commission or CAC is the over arching agency that oversees company formation and operation in Nigeria. It is important to acquaint yourself with the requirement of the CAC in a bid to ensure a smooth registration process. For an LLC, this involves preparing the necessary documentation, such as: For an LLC, this involves preparing the necessary documentation, such as:

Memorandum and Articles of Association: These documents detail the management of the company explaining its formation, organization, and precisely those of internal regulations.

Particulars of Directors: About the people that will run the company.

The company ‘s capital structure and especially the number of issues shares.

Engage a Professional

Since the process involves some legalities especially to the non-Nigerians, it is recommended to either hire a lawyer or a CAC accredited agent. These professionals can assist with: These professionals can assist with:

There is a need to ensure that all the documents produced by the company meet the formalities of the CAMA act.

Filing FORMS, and other essential application documents with the CAC.

Ensuring payment of any fees that may be required is made easier.

Obtain Necessary Permits

Like in any other country, it is paramount that you fulfill all the legal requirements before you commence operations in Nigeria this may take the form of license’s or permits depending on the type of business you intend to establish and your nationality. For example:

It is obligatory for the foreign ownership of the businesses or mandatory in case the you plan to hire expatriate workers.

Nigerian Investment Promotion Commission (NIPC) Certificate: To monitor compliance with investment regulations by corporate entities with participation by nationals of other countries.

Firms were therefore obliged to adapt to the rules inherent in the Nigerian market in order penetrate it successfully.

Familiarize Yourself with the Environment

Business Nigeria base environment is volatile and diverse. Another factor that must be considered is that there is need to perform market analysis to have a clear understanding of the market trends in the particular country. This knowledge will.

Build Local Partnerships

It is always advisable to form good relations with the local companies as this can accrue many advantages. These partnerships may also give you information about the market that will enable you to understand the regulatory environment within that region and also serve to locally endorse your company.

To act in a responsible manner with regards to ongoing obligations

Compliance does not stop after registration, but the extent of their supposed obedience of the rules of law as contained in various legislation is illustrative of how much more there is to compliance. Some of their administrative requirements include; filing of the annual returns to the commission and also compliance with the tax legislations that are governed by the Federal Inland Revenue Service (FIRS). Noncompliance with the above stated legal requirements attracts penalties or even the registration of the business.

Conclusion

When it comes to business formation for a foreigner, one has to select the right type of the structure, and this depends on the level of the protection from legal responsibility, the ease of compliance and the potential for expansion. Still, it has a number of weaknesses, particularly when it comes to foreign investors, and this is basically because it provides a sole proprietorship. On the other hand, an LLC, has a great legal risk management and better chances of growth and capital. A Sole Proprietorship is easy to establish and the lack of protection for the owners liability makes it less favorable to foreign persons. However, an LLC has the structure of a legal entity, and more importantly it has access to resources to enable it sustain itself in the long run compared to a sole proprietorship.

Call to action to contact for a consultation

Speak to a lawyer and make sure that you get the right legal advice from the onset. And start the procedure on the formation of LLC business entity today. Explore Local Partnerships:

One of the ways is to partner with the local businesses in order to reach out to the market. These preventive measures will put your business in the right stead, and arm you adequately to manage fuzz in the Nigerian business domain, successfully.

In order to account for the possibility of any hitches when establishing your business, it is advised that you seek legal advice on,

Tel: (+234) 802 320 0801, (+234) 807 576 5799

Email: info@qeeva.com

Office Address: 5, Ishola Bello Close, Iyalla Off Street, Alausa, Ikeja, Lagos, Nigeria

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