Eyitayo Ogunyemi | @eyitayolaw
One of the questions that I usually ask my students during my training sessions for Entrepreneurs is for them to tell me what they understand by a Limited Liability Company and a Business Name, and why they will choose the business option that they are opting for.
Unfortunately, I usually do not receive an answer that captures the basic differences, and it is unfortunate too that many Investors have chosen their business option without proper guidance.
This article proffers keynote differences between a Business Name and a Limited Liability Company in Nigeria. The points stated below are not exhaustive, but they constitute some of the basic differences between a Limited Liability Company and a business name under the Nigerian Law:
DIFFERENCE NO 1:
DO YOU WANT YOUR BUSINESS TO BE YOU OR DIFFERENT FROM YOU?
Business Name: A Business Name is the name and style with which you trade; remember that it is just a “style”, and it is therefore not different from you. Being a mere style, the business does not assume a separate legal entity; cannot sue, nor be sued and properties cannot be purchased in the name of the business.
Another point that you can identify with the above is that, when the owner dies, the business also dies (since in the first place, it does not have a life of its own).
Company: The moment your Company is registered, it becomes a separate entity different from you (otherwise known in law as an “Artificial person”). The best way to understand this severance process is to consider pregnancy, and delivery process- once a child is born, the child has an independent life; can grow, stand alone (with time), and even die. The process of the growth of the child is not hinged, as such, on that of the mother.
By implication, ‘your company’ is considered to be different from you after registration; you can be broke while the company is rich, and the death of the founder does not necessarily mean the death of the company, because the company has a life of its own.
DIFFERENCE NO 2:
DO YOU WANT TO RUN A ONE MAN BUSINESS? ONLY A BUSINESS NAME WILL DO.
Company: If you intend registering a company, it takes two or more persons to form the company. The popular form of company is “Company Limited by Shares”, and at least two people must subscribe to being shareholders in the company.
Business Name: If you are interested in running a one man business where everything will revolve around you and you alone, registration of a Business Name may be suitable.
Note however that you can also register Business Name where you and any other person intend to operate as partners.
DIFFERENCE NO 3:
DO YOU WANT THE VALUE OF YOUR INVESTMENT TO BE STATED IN THE PUBLIC DOCUMENTS OF YOUR PROPOSED BUSINESS? A COMPANY MAY BE YOUR BEST OPTION
Company: If your level of ownership, stake, investment, or interest in your proposed business differs from that of your co-investors and you want this to be recorded publicly, you may choose to incorporate a company (i.e. Limited Company).
Business Name: If you register a Business Name, your level of ownership, stake, investment, or interest will not be publicly recorded. If for any reason you prefer to register a Business Name and you want the extent of your ownership, stake, investment, or interest to be clearly spelt out, you can do this preparing a Memorandum of Understanding between you and your partners. You may consult your choice Legal Consultant for further information.
DIFFERENCE NO 4:
DO YOU WANT AN EXISTING COMPANY TO OWN SHARES IN A BUSINESS THAT YOU ARE ABOUT TO START? ONLY A COMPANY REGISTRATION WILL BE SUITABLE
Company: If you operate a company that is registered, and you want that company to own shares in a business that you are about to register, or you are a foreign investor with a company already registered in your Country, you may choose to register the intended business as a Company and then purchase shares for the existing company from the allotted shares of the proposed company.
If the existing company is however undergoing a process of being wound up, it cannot join in the formation of the company to be incorporated.
In a like manner, if you already have a company in operation and what you intend to register is a Business Name but you want your existing company to have a stake in the Business to be registered, you can give instruction to your Legal Consultant to record the existing company as a partner in the new Business Name to be registered.
Business Name: You cannot use your Business Name (as an entity) to own shares in a company neither can you start a partnership in the name of your registered Business Name.
For non- Nigerians (aliens) and foreign companies seeking to do business in Nigeria, once you have complied with Nigerian laws regulating the rights and capacity of aliens who want to undertake or participate in trade or business in Nigeria, you will be allowed to join in forming company in Nigeria.
DIFFERENCE NO. 5:
IF YOU HAVE MORE THAN 20 PARTNERS, YOU MAY HAVE TO REGISTER A COMPANY
Company: Where a business is intended to be carried on as a partnership, and the partners are more than 20 people, the business can only be registered as a company but not as a business name.
Business Name: You can register these three businesses as a business name notwithstanding that the partners are more than 20 are;
a. Co-operative Societies registered under any law in Nigeria;
b. Partnership of more than 20 Lawyers each of whom is qualified to practice as a lawyer in Nigeria; or
c. Partnership of more than 20 Accountants each of whom is qualified to practice as an accountant.
DIFFERENCE NO. 6:
IF YOU HAVE MORE THAN 50 INDIVIDUAL INVESTORS, YOUR ONLY OPTION MAY BE TO START A PUBLIC COMPANY.
Company: Where the total number of persons who intend to own the shares of a proposed company is more than 50 people, the company can only be registered as a public company. In other words, a private company in Nigeria must not have more than 50 shareholders.
There are exceptions to this rule; for instance, where an employee becomes a member/shareholder upon his employment, or where the employee continues to be a shareholder during and upon the expiration of his employment; his tally may not be taken for the purpose of numbering the 50 members.
Consider the following illustrations:
1. If AZ Private Company has 50 shareholders and Bob was given a number of shares in AZ Private Company upon his employment, he is not going to be numbered as Number 51 shareholder; rather, the number of shareholders will still stand at 50 in the eye of the law.
2. In a similar vein, if Bob continues to hold shares as an employee until he stops working for AZ Private Company, and he continues to own the shares after his employment, he is not going to be numbered for the purpose of counting the 50 benchmark.
3. Two or more people, or even an Association or a Group can invest in a company jointly. They are treated as a single member for the purpose of numbering the members of the company. It is however important that your Association or group must have been registered under the appropriate law.
For further information under this heading, you may check my article titled: How to Register Your NGO, Church, Mosque, and Other Associations with Corporate Affairs Commission (C.A.C.)
DIFFERENCE NO. 7:
THE STATUS OF YOUR KEY INVESTORS DETERMINE THE KIND OF BUSINESS ARRANGEMENT
Company: In a company arrangement, your shareholders are considered as the joint owners of the company. The shareholders elect the Board of Directors who are responsible for the daily affairs of the company and also give periodic account of management to the shareholders.
Note however that a shareholder may also be a director or even the company secretary.
Business Name: In a Business Name arrangement, there is no clear-cut difference between the business holder and the director because in most cases, the director is the owner of the business.
This article has been designed for information purposes alone and is not intended to take the place of a legal advice. Readers are therefore advised to seek proper legal advice.