In Nigeria, knowing the best business structure that suits the idea you have in mind is a big flex. In recent times, businesses have continued to spring up consistently in Nigeria attesting to the “can do” spirit of Nigerians in solving problems and providing value.
While no part of starting a business is easy, choosing the right business structure for your business is as important as getting the right staff or choosing a business location.
If you just started out, you might be wondering what exactly a business structure is and why it matters.
The truth is that a business structure will define the legal form your business will take. And this will go a long way in determining everything from daily operations and how much you pay in taxes, down to your ability to raise funds.
To help you make informed decisions, this article explains the different business structures available in Nigeria and how you can choose a suitable one for your business.
Business Growth and Structuring in Nigeria
With the nation’s entrepreneurial spirit soaring, it’s no wonder that Nigeria is often hailed as the giant of Africa in terms of business potential.
Nigeria has one of the largest economies in Africa, with small and medium enterprises (SMEs) contributing significantly to this growth.
In fact, SMEs contribute a whopping 49 percent to Nigeria’s GDP and account for about 99 percent of Nigeria’s businesses.
As you might have already guessed, this economic impact explains why more and more entrepreneurs are setting up businesses in the country.
And ultimately, why the knowledge of business structures and how to make the right choice is crucial at this point.
Types of Business Structures in Nigeria
In Nigeria, there are several business structures you can choose from, each with its own benefits and drawbacks.
Keep in mind that all of these structures are only suitable for certain kinds of businesses.
So, take a look at each of the options and choose which of them best works for your business.
1. Sole Proprietorship
A Sole Proprietorship is the simplest and most common form of business structure in Nigeria. It is a business owned and operated by one individual, with no legal distinction between the owner and the business entity.
This means the owner is personally responsible for all the business’s debts and liabilities. It is also referred to as business name registration.
A Sole Proprietorship is ideal for small, low-risk businesses and those that don’t require a lot of capital to start. Examples include freelance services, small retail shops, and artisans.
One of the advantages of this structure is that registering as a sole proprietorship is straightforward and requires minimal paperwork compared to other business forms.
Also Read: Why You Should Register A Company And Not A Business Name
2. Partnership
A Partnership involves two or more people coming together to run a business. Partnerships in Nigeria are classified into General Partnerships and Limited Partnerships.
In a General Partnership, all partners are equally responsible for the business’s liabilities, while in a Limited Partnership, some partners have limited liability based on their investment in the business.
Partnerships are suitable for businesses where multiple owners bring complementary skills/values and where shared responsibility is advantageous. Examples include law firms, consultancy firms, and small enterprises looking to expand.
3. Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a popular choice for many entrepreneurs in Nigeria.
It is a separate legal entity from its owners, meaning the company itself can own property, incur debt, and be sued in its own name. Owners’ liability is limited to their shares in the company.
LLCs are suitable for businesses that are looking to scale and need a more formal structure to attract investors. This includes startups, tech companies, and medium-sized enterprises.
An obvious advantage of this structure is that owners’ personal assets are protected from business debts and claims. And LLCs can raise funds more easily by selling shares to investors.
However, you need to keep in mind that LLCs are subject to more regulatory requirements and oversight compared to Sole Proprietorships and Partnerships.
4. Public Limited Company (PLC)
A Public Limited Company (PLC) is a more advanced and complex business structure.
Unlike an LLC, a PLC can sell its shares to the general public and can be listed on a stock exchange. This structure is suitable for larger companies that require significant capital.
PLCs are best for large enterprises that require substantial capital investment and are looking to expand significantly. Examples include large manufacturing companies, financial institutions, and multinational corporations.
Advantages is that there’s no limit to the number of shareholders, making it easier to raise large amounts of capital.
One drawback to think about is that PLCs are heavily regulated by the Corporate Affairs Commission (CAC) and the Securities and Exchange Commission (SEC), which adds to the complexity and cost.
Also Read: 10 Factors to Consider Before Choosing a Business Partner for Your Startup
5. Incorporated Trustees (Non-profits)
Incorporated Trustees are designed for non-profit organizations, such as charities, religious groups, and social clubs.
This structure allows an organization to be a legal entity separate from its founders and is governed by a board of trustees.
This structure is ideal for organizations focused on social, religious, educational, or charitable activities. Examples include NGOs, community development organizations, and foundations.
Organizations focused on social, cultural, educational, or charitable missions, such as NGOs, community groups, or charitable foundations.
One benefit of this legal structure is that non-profits often enjoy tax exemptions on their income and donations.
On the other hand, non-profits are restricted in how they can use their funds and must adhere to their stated mission.
Also, setting up a non-profit/incorporated entity requires fulfilling specific legal requirements and obtaining approvals from regulatory bodies.
How to Choose a Business Structure for Your Business
When it comes to choosing the right business structure for your business, understanding the various structures available is the first step.
The next is to weigh several factors to find which structure is the best fit for your business.
Below are the factors that will help you choose the best:
1. Liability
This means, how much of the business risk can you take on? Consider how much personal liability you’re willing to accept.
If limiting your personal risk is a priority, an LLC or PLC might be more suitable than a Sole Proprietorship or General Partnership.
2. Taxation
There’s no getting around this. The reality is that your business must pay taxes one way or the other.
Different structures have different tax implications. For instance, Sole Proprietorships and Partnerships may face simpler tax reporting but potentially higher personal tax rates compared to LLCs and PLCS.
Also Read: A Comprehensive Guide to Establishing Your Travel and Tours Company in Nigeria
3. Capital Needs
How do you envisage expansion and financial aid? Do you intend to fund your business alone or will you throw it open to the public?
If you plan to raise substantial capital, a PLC or LLC is typically more attractive to investors than a Sole Proprietorship or Partnership.
4. Control
How much control you want in the business will determine what business structure you will go for.
Usually, sole proprietorships and partnerships offer more control to owners compared to PLCs, where shareholders have voting rights.
5. Compliance and Cost
Evaluate your willingness to deal with regulatory compliance and higher setup costs.
More complex structures like PLCs come with significant compliance obligations and costs than smaller setups like sole proprietorships.
6. Future Growth
Think about your long-term vision for the business. If you intend to grow your business slowly on your own, registering a business name as a sole proprietor is right on point.
However, if you plan to scale significantly or go public, starting as an LLC and transitioning to a PLC later could be a strategic move.
Also Read: 5 Important Features to Make Your Contract Legal and Valid
Choose the Best Structure for Your Business
After your product/service and staff selection, the next critical item on the list should be choosing a business structure.
Since the business structure you need impacts your legal obligations, financial liabilities, and growth potential, this is an aspect you should dedicate your time to.
Do well to assess your business goals, financial needs, and personal preferences before making a final decision.
We also recommend that you consult with legal and financial advisors to help you with valuable insights on this journey.
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