Startup Setup Basics, Part Two: Company, Business Name Or Partnership?

Hi there!

Last week, I walked you through the various legal structures available to startups. This week, we are going to go deeper, into the question of why you would choose any of the structures I explained. I will try to be as practical as possible and won’t bore you with textbook reasons.

No single entity can be termed the perfect entity. Instead, what we have is an entity that is most suitable for a particular situation. Often the question is whether to register a business name, a partnership or incorporate a limited company, as such I would restrict this article to these entities alone. If you need a definition or description of these entities, please refer to last week’s article.

Without further ado, I’ll dive into explaining why you may or may not want to choose any of these entities.

Business Name

Other than the obvious personal liability issues (explained last week), which leave the founder(s) of a business name exposed, an important consideration is whether the founder(s) intend to take OPM (other people’s money) into their business. Particularly if these other people are institutions. No institution worth its salt would put money in an entity that is a business name, whether by way of debt or equity. So if you plan on borrowing money from the bank or attracting accelerator or venture capitalist (VC) funds, a business name is not for you, despite its few advantages.

First, what are these advantages? The greatest benefit of registering a business name is the absence of double taxation. Unlike a company, a registered business name pays income tax at one level only, i.e. none by the entity itself, but by the founders alone after distributions from the business must have been made to them. Of course, other non-income taxes need to be remitted, such as withholding tax, value added tax, etc.

Of all available entities, a business name is also the least expensive to set up and maintain. The statutory fees are the lowest as you can observe from the recent reduction of the statutory registration fees by CAC to N5,000 up until 31 March 2019. You can also walk into the CAC by yourself as a non-lawyer to register a business name, thereby avoiding legal fees (my colleagues would crucify me). You can also opt to do this yourself online on the CAC Portal. In addition, there are fewer statutory filing obligations with the CAC, thereby making it not only less expensive but offering some degree of privacy.

Partnership

Except I specify otherwise when I use the word partnership here, I mean all the available partnership structures together, i.e. Partnership in its undiluted state, Limited Partnership (LP), or Limited Liability Partnership (LLP).

For a partnership, its strength also happens to be its weakness. “Sharing” is a double-edged sword that is able to make or wreck a partnership. As each partner is seen before the law to be an agent of the partnership and the other partners, there is a weightier implication of shared responsibility and you want to be very careful about choosing who you partner with. Liability in a partnership rests with the partners, and not a distinct entity as obtains with a company.

For the LPs or LLPs however, some partners may have their liability limited to the extent of their participation in the partnership. For the LP, there must be at least one general partner with the other partners being able to limit their liability whilst with the LLP under the Lagos State Laws, all the partners may opt to limit their liability although a few exceptions (not relevant for this topic) where this limitation may be discarded with exists.

Like a registered business name, taxation for partnerships is also only at the founders’ level which reduces the money you “dash” the tax-man.

Private Limited Liability Company

As mentioned above, if you have any plans of taking OPM and these other people happen to be institutions, this is the vehicle for you. That advantage notwithstanding, incorporating a company creates some degree of additional complexity and expenses as compared to opting for a business name.

[A bit of an aside — Whilst the CAC says you can incorporate your company without having to seek assistance from a lawyer, I would not recommend you do so. I don’t say this just because it takes food away from the table for my colleagues and I, but also because it is an action that may sometimes be Kobo wise, Naira foolish, especially if you are a startup in the true sense of the word and not a “trading company”. I say this with no disrespect to trading companies. You can incorporate your company by yourself quite alright but in filling some information on the company incorporation application form, you would need the assistance of a lawyer. Also in preparing your Memorandum and Articles of Association (MEMART), you would also need the guidance of a lawyer in order to clearly state what your business is authorised to do and what it is not authorised to do. True story of some founders I know who registered their company themselves — they ended up with a Memorandum & Articles of Association signed by two sets of people… Memorandum signed by the founders, Articles signed by “unknown persons”. In case you didn’t know, the entire MEMART should be signed by the same set of people.]

Okay, let’s get back to why we are here — the reason a company may or may not be suitable for you.

One of the advantages of a company is its ability to continue to exist beyond the death of its shareholders, unlike in a Business Name or a Partnership (except the Partnership Agreement states otherwise). Companies like Coca- Cola, Procter & Gamble, Apple etc. are examples. It is also a separate entity distinct from its shareholders as such it is possible for a company to be liable for an action whilst the shareholders are shielded from such liability.

On the other hand, however, setting up a company can be expensive, there are numerous filing obligations (annual returns, resolutions, change of directors and/or shareholders etc.), and the often mentioned double taxation.

Double taxation, as the name implies, means being taxed twice, so how does this happen? When a Company declares profits, it pays tax at a corporate level, i.e. as a company to the Federal Government through the Federal Inland Revenue Service (FIRS). And then when it distributes profits (dividend) to its members, each member pays personal income tax on that dividend to the government of the state where they are resident. So if you live in Lagos, it would be the Lagos State Internal Revenue Service (LIRS) that you would have to pay your taxes to.

As you can see, no one size fits all. Choosing your preferred legal structure mostly depends on your type of business, your plans for the business and the stage you are at. To make the right decision, I would advise that you consult your lawyer.

Legally yours,

Odun

Disclaimer: Articles do not constitute legal advice, neither has a lawyer-client relationship been created by engagement in the comment section. If you require professional legal advice, kindly contact your legal adviser.