Introduction
New business owners often grapple with deciding between registering a business name or incorporating a company limited by shares. Both options have their merits, but understanding the key differences is essential to choosing the structure that best suits your business needs. Below is a comparison of the two entities to help guide your decision.
1. Directors and Shareholders vs. Sole Proprietorship
A company limited by shares requires at least one director and one shareholder, and they can be the same person. In contrast, a business name requires only a sole proprietor or multiple partners in the case of a partnership.
2. Separate Legal Entity
A company limited by shares is a separate legal entity from its shareholders and directors. It can sue or be sued, and it can own properties in its name. A business name, however, is not distinct from its owner(s) and any legal action or asset ownership is in the name of the proprietor or partners.
3. Tax Obligations
A company limited by shares is taxed as a legal entity under the Companies Income Tax Act and pays taxes to the Federal Inland Revenue Service (FIRS). In contrast, a business name’s tax obligations fall on the proprietor, who pays personal income tax under the Personal Income Tax Act to the State Board of Internal Revenue.
4. Liability Protection
In a company limited by shares, the liability of shareholders is limited to unpaid shares they hold. This means personal assets are protected if the company incurs debt. In a business name, the owner(s) bear full personal liability, and their assets can be pursued by creditors in case of debt.
5. Required Documentation
A company limited by shares receives a Certificate of Incorporation and important legal documents like the Memorandum and Articles of Association (MEMART) from the Corporate Affairs Commission (CAC). These documents are often required to secure contracts or do business with other organizations. A business name, on the other hand, receives a Certificate of Registration but is generally more limited in its ability to bid for large contracts.
6. Ownership Structure
A company limited by shares can have up to 50 shareholders, whereas a business name can have a maximum of 20 partners, except in the case of law or accounting firms.
7. Filing Requirements
Companies limited by shares are required to file annual returns with the CAC and hold annual general meetings. Business names are not obligated to hold general meetings or file returns in the same manner.
8. Access to Funding
A company limited by shares has more options for raising capital, including the ability to issue shares to private investors and take out loans in the company’s name. A business name relies more on personal funding from the proprietor.
9. Scale of Operations
A company limited by shares is suited for medium to large-scale businesses, while a business name is more appropriate for small to medium-scale businesses.
10. Conversion Options
A company limited by shares can be converted to a public limited company (PLC) if it wishes to go public. A business name, on the other hand, can only be converted into a limited liability company.
11. Continuity after Death
A company limited by shares continues to operate even after the death of a shareholder, with the shares being passed on to heirs or new directors being appointed. A business name, however, is usually dissolved upon the death of its founder unless there are surviving partners to continue the business.
Conclusion
Choosing between a business name and a company limited by shares depends on the scale, liability preferences, and future goals of your business. Both structures offer unique benefits, but for entrepreneurs seeking to limit personal liability and scale operations, incorporating a company limited by shares is often the more advantageous choice. Regardless of the chosen structure, both business entities can be formed by a single individual, in line with Nigeria’s Companies and Allied Matters Act 2020.
For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, Online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd. Visit us at www.innerkonsult.com or reach out via WhatsApp at +2348038460036. You can also find us at our offices in Lagos or Ogun State, Nigeria.
