Legal compliance involves adhering to rules, laws, and policies that regulate business practices in a specific jurisdiction. For startups, this means fulfilling all necessary requirements to remain compliant at all times.

Defining a Startup in Nigeria

A startup, as defined by the Nigerian Startup Act, is a company engaged primarily in producing digital or technological services. To qualify as a startup:

• It must be a limited liability company not older than 10 years.
• At least one-third of its shareholding must be owned by a Nigerian founder or co-founder.
• It should aim to create, innovate, produce, develop, or adopt a unique digital technology product, service, or process.
• It can also be a holder or repository of a digital product or process or an author of registered software.

Signed into law on October 19, 2022, by President Muhammadu Buhari, the Nigerian Startup Act aims to foster innovation and entrepreneurship. Once a company meets the above criteria, it is issued a startup certificate valid for ten years.

Legal Compliance Requirements for Startups

1. Corporate Affairs Commission (CAC)
   • Startups must incorporate with the CAC per the Companies and Allied Matters Act.
   • They must file annual returns within 18 months of incorporation.
2. Taxes and Accounting
   • Startups must file Companies Income Tax within 18 months of incorporation and annually by June 30.
   • They must remit VAT monthly to the Federal Inland Revenue Service (FIRS) by the 21st of each month.
3. Data Protection
   • Startups processing data for over 1,000 subjects within six months must file these data with the National Information Technology Development Agency (NITDA) by March 15 each year.
4. Employment Matters
   • Startups must contribute 1% of their employee payroll to the Nigeria Social Trust Fund within two years of operation and annually thereafter.
5. Compliance with Relevant Laws
   • This includes anti-money laundering (AML) compliance, adherence to the Federal Competition and Consumer Protection Act (FCCPA), and Know Your Customer (KYC) requirements.
   • Some startups need a Special Control Unit Against Money Laundering (SCUML) Certificate.
   • Specific licenses are required for fintech services, such as digital crowdfunding, digital banking, and switching and processing licenses.

Benefits of Legal Compliance for Startups

1. Regulatory Support
   • The Nigerian Startup Act simplifies administrative and compliance processes. The startup portal provides a centralized platform for accessing regulators, easing licensing and regulatory interfaces.
2. Training, Building, and Talent Development
   • Labeled startups have access to training and capacity-building programs. They can deduct expenses for research and development fully and receive financial support for research facilities.
3. Access to Financing
   • The Act establishes a Startup Seed Investment Fund, managed by the Nigerian Sovereign Investment Authority, to support labeled startups.
   • Labeled startups can access credit guarantees, grants, and loans from the Central Bank of Nigeria and other bodies.
   • Export incentives and financial assistance are available for startups involved in eligible export activities.
4. Tax Relief
   • Labeled startups can obtain pioneer status, exempting them from company income tax for 3-5 years.
   • They may also receive income tax exemptions for up to five years.
   • Additional fiscal incentives may be provided by the Federal Government.
5. Investment Support
   • Investors in labeled startups can receive tax credits and exemptions from capital gains tax on qualifying investments.

Consequences of Non-Compliance

Non-compliance can lead to significant penalties, including fines, license revocations, and operational restrictions. For instance:

• Failure to file annual returns to the CAC can result in additional fees.
• Failure to remit contributions to the NSITF can lead to fines of at least 2% of the amount due.
• The FIRS imposes penalties for late CIT and VAT filings, starting at N25,000 for the first month and increasing for subsequent months.

Conclusion

Understanding and navigating the regulatory landscape is crucial for startups in Nigeria. Ensuring legal compliance helps startups avoid penalties and leverage available support for growth and development. Engaging a lawyer for regulatory advice and compliance management is highly recommended.

For professional advice on Accountancy, Transfer Pricing, Tax, Assurance, Outsourcing, online accounting support, Company Registration, and CAC matters, please contact Inner Konsult Ltd at www.innerkonsult.com at Lagos, Ogun state Nigeria offices, www.sunmoladavid.com. You can also reach us via WhatsApp at +2348038460036.