Anyone can decide to start a company in Nigeria but knowing the right one to choose can be a difficult task. This article will make it easy for you by revealing the type of companies available and guide you in choosing the right company for your business in Nigeria.
In this article, we will discuss:
- What a company is
- The governing law and organisation of companies
- The types of companies
- The factors to consider when choosing the right company
What is a company?
A company is a legal entity created that can exist separately from its owners. It is capable of doing everything a natural person can do legally. It can buy properties, it can enter into contractual transactions, it can sue and be sued.
It differs from other corporate organisations in terms of a more formal structure with directors, shareholders, corporate meetings and it can continue to exist even after the death of the owners.
Also Read: How to Choose the Best Structure for Your Business in Nigeria
This makes it the most ideal type of business because of its numerous benefits in the corporate environment.
The following are what makes a company
- Shareholder: These are the individuals or corporate entities that own shares in the company. Through the percentage of shares they own, they own a piece of the company and are entitled to dividends. A company can have just one shareholder.
- Directors: These are persons appointed by the shareholders to direct and manage the affairs and operations of the company. A company can have at least one director. Any adult person age 18 and above can be a director. However, there are few exceptions. A mentally ill person, a person age 70 and above, a person declared bankrupt, an employed civil service worker and a person disqualified by the court cannot be a director.
- Company secretary: This person is responsible for administrative tasks such as keeping and filing documents on behalf of the company. Legal professionals and corporate secretaries are mostly company secretaries.
- Liabilities: These are debts owed by the company to investors.
- Assets: These are the properties (physical and intellectual), equipments, resources owned and controlled by the company.
- Company name: This is the unique name of the company reserved, approved and registered with the CAC.
- Registered address. This is the official address of the company in Nigeria.
- Memorandum and Articles of Association. This is the company’s constitution that outlines the rules of operating according to Companies and Allied Matters Act (CAMA).
- Certificate of incorporation; evidence that the company is registered.
Governing law and Organisation
There is an organisation that governs the operation of companies in Nigeria including registration and it is called the Corporate Affairs Commission (CAC). No company is permitted to operate in Nigeria without being registered with the CAC.
However, there are different types that the CAC recognises in line with the Companies and Allied Matters Act (CAMA) 2020. CAMA is the law that governs the operation of companies in Nigeria.
Also Read: 16 Changes About Companies Introduced By CAMA 2020
Types of companies
Under CAMA, there are 4 main types of companies that can be registered and they have their peculiar features. They include:
- Limited Liability Company (Private Company Limited by Shares and Public Limited Company)
- Company Limited by Guarantee
- Unlimited Company (Private Unlimited Company and Public Unlimited Company)
We will now discuss them one after the other.
Limited Liability Company
A Limited Liability Company (LTD) is the most popular choice of company. The features it has is what makes it the popular choice. Although it is popularly known as LTD outside Nigeria, it is known as LTD in Nigeria.
What makes it a limited liability company is that the shareholders cannot be held personally responsible for the company’s liabilities (debts). They can only be held responsible based on the amount they contributed as shares to the company.
It is subdivided into 2 types. The private company limited by shares and the public liability company.
Private Company Limited by shares
A Private Company Limited by Shares is labelled ‘private’.
What makes it private is that the company has it stated in its Memorandum of Association and it can only raise funds amongst its owners. The public cannot subscribe to its share capital. Share capital is the amount the owners must contribute in raising funds for the commencement of the company operations.
Another fantastic feature is that it can exist with just one shareholder, one Director and one person serving as Persons with Significant Control (PSC). This person deals directly with the company and owns a minimum of 5% of the company shares.
In this case, the PSC will be the shareholder having 100% of the shares of the company unless there is more than one shareholder in which the person qualified to be a PSC must own at least 5%.
In a Private Company Limited by Shares, even a secretary is merely optional.
The minimum share capital of a Private Company Limited by Shares is N100,000. This means that this is the minimum amount the company must raise from its shareholders.
This makes it even easier for the single shareholder to raise such an amount singlehandedly. However, the maximum number of shareholders for a LTD is 50.
Public Company limited by shares (PLC)
This is another popular choice of company. Only that it is a bit more complex to form than the LTD.
In a PLC, the minimum share capital is N2,000,000 with a minimum number of 2 shareholders. It does not have a maximum number.
It also requires at least 2 Directors and a company secretary is a must have.
The liabilities of its shareholders are also the same with that of a Private Company Limited by Shares.
However, unlike a Private Company Limited by Shares where the company is not permitted to raise funds from the public through shares selling, the PLC is permitted to sell its shares to the public.
In addition, the PLC has access to more facilities like the capital market where the company can sell its shares to raise money rather than getting a loan.
Examples of industries registered as a PLC are banks, insurance companies, telecommunication companies, energy and utility companies, airlines, etc
The company name usually ends as ‘PLC’.
Company Limited by Guarantee (Ltd/Gte)
A company limited by guarantee is not usually formed for profit purposes but for non-profit purposes such as charity, education, research, culture, sports, etc.
This is why it does not have a share capital. And if it does not have a share capital, there cannot be shareholders nor distribution of profits.
A peculiar feature of the Ltd/Gte is that the registration requires the approval of the Attorney General.
In addition, if the company gets to owe debts and folds up, the members of the company must contribute at least N100,000 each to pay off the debts.
Another interesting fact is that the company’s assets must be transferred to a similar company or Non Governmental Organisation (NGO).
You will mostly identify a company limited by guarantee with the name that ends with Limited by Guarantee or Ltd/Gte.
Unlimited Company
The unlimited company is a company that has no limit to the shareholder’s liabilities in case the company incurs debts or liabilities.
It is also sub divided into two. They are Private Unlimited Company and Public unlimited company.
Private Unlimited Company
This type of company is quite unpopular.
Although, it is similar to the private company limited by shares, the only difference is that the members have unlimited liability.
If the company incurs debts, the members (shareholders) will have to personally contribute to set off the debts.
There is no limit to their shares contribution, therefore, no limit to the amount they must contribute should the company run into debts.
The name usually ends with ‘Unlimited’ or ‘Ultd’.
Public unlimited company
Similarly to the public limited company, the public company can also operate in every way the public limited company can.
The difference is that all shareholders including the public who have purchased shares from the company have unlimited liabilities.
This means that if the company incurs debts, there is no limit to the amount they must contribute. They may use their personal assets to offset the company’s debts.
However, the company gets to enjoy privilege of raising of funds from the capital market.
The name also usually ends with ‘Unlimited’ or ‘Ultd’.
Factors to consider while choosing
- Nature of Business
There are some industries that can only survive and are mandated to be registered under a particular type of company.
For instance, most large banks and insurance companies, aviation, telecommunications cannot be registered under a limited liability company but as a public company because of the complexity of its operations.
2. Liability
When starting a business, it’s important to consider the level of personal risk you’re willing to take.
A Private Limited Liability Company (Ltd) and Public Company (Plc) offer limited liability protection, meaning your personal assets are generally safe in case the business incurs debts or liabilities.
On the other hand, the unlimited liability company has no limits to the liabilities, meaning there is no liability protection. Personal assets can be used to pay off company’s debts and liabilities.
Meanwhile, a Company Limited by Guarantee (Ltd/Gte) has no share capital, and members’ liability is limited to the amount contributed at the time of folding up, making it more suitable for non-profit or charitable organizations.
3. Share Capital
As a business owner, if you need to raise capital to fund your business, a Private Limited Liability Company (Ltd) and Public Company (Plc) can sell their shares to investors.
What’s more? A Public Company (Plc) can raise capital from the public through stock exchanges in the capital market. This makes it a more suitable option for large businesses.
A Company Limited by Guarantee (Ltd/Gte) however relies on member contributions and grants, making it less suitable for businesses that require significant funding.
4. Number of Members
If you do not fancy large number of persons controlling the business based on your vision for the business, a company limited liability by shares may be a good option.
A Private Limited Liability Company (Ltd) has a maximum of 50 members, while a Public Company (PLC) and Company Limited by Guarantee (Ltd/Gte) have no maximum limit.
On the other hand, if you need more hands on deck and care less about large members, a Public Company (PLC) or Company Limited by Guarantee (Ltd/Gte) might be more suitable.
5. Accountability
Transparency is an important factor to be taken into consideration.
Public Liability Companies require strict reporting requirements and high levels of transparency.
If as a business owner, you are comfortable with this requirement, a Public Company (Plc) might be a good choice.
However, if you prefer a bit of privacy regarding your business operations, a Private Limited Liability Company (Ltd) and Company Limited by Guarantee (Ltd/Gte) might be much better.
6. Purpose
If you are considering making profits from your business, then a Private Limited Liability Company (Ltd) and Public Company (Plc) are great, while a Company Limited by Guarantee (Ltd/Gte) is more suitable for charitable organisations, or social enterprises.
7. Management
If you prefer sole management, a private company limited by shares is a good option since the law permits one director for the management of its affairs.
But the other types require a minimum of two directors.
8. Funding
An important factor is the ability to raise funds.
A Private Limited Liability Company (Ltd) and Public Company (Plc) can raise funds through shares, loans, or grants and even from the capital market.
A Company Limited by Guarantee (Ltd/Gte) however is limited on the amount of funds it can raise. It can only rely on member contributions, grants, or donations.
9. Taxation
Here comes an interesting factor. It is illegal for A Private Limited Liability Company (Ltd) and Public Company (Plc) not to pay tax since they make profits. A Company Limited by Guarantee (Ltd/Gte) however cannot be taxed because it was not designed to make profits.
10. Regulatory Requirements
Another factor to consider is the level of regulatory compliance and governance your business requires.
A Public Company (Plc) has strict regulatory requirement, while a Private Limited Liability Company (Ltd) and Company Limited by Guarantee (Ltd/Gte) have less formal requirements.
11. Growth
Lastly, you must consider your business’s future. Public companies have more growth potential compared to Private Limited Liability Company (Ltd) because of funding opportunities and members.
A Company Limited by Guarantee (Ltd/Gte) however is not focused on growth.
Conclusion
In conclusion, choosing the right company type is the first step in setting up a successful business.
By selecting the right company and seeking professional advice from the right business lawyers can help prevent legal issues and prepare your business for a brighter future.
At Charis Legal Practice, we offer our services to sophisticated entrepreneurs who are particular about getting it right in the legal foundation of their business right from the get go.
If you need our team to work with you to set up a company, you can click HERE to get started.
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