Starting and running a business is hard.
At the very beginning, one of the questions you have to ask yourself is: What kind of business am I running?
It might seem insignificant at the time, especially when you are still quite taken with how awesome your idea is. However, choosing how your business is organized may be the wisest decision you can take at that early stage.
You have to ask yourself: am I going for a registered business name? (Which is usually for sole proprietorships and partnerships)
Or a limited liability company? Or a company limited by guarantee? Or an Incorporated Trustees?
Is this decision viable? Because to a large extent, your business determines the types of applications you will be required to submit.
For the purpose of this article, we will be focused on company incorporation.
So what is an Incorporated company?
Also referred to as a corporation or a limited liability company, it is a type of business that offers tremendous benefits over being a sole proprietor.
For one, there is the liability protection. Forming a corporation gives you the leeway to raise capital through the sale of shares of your company.
How do you incorporate a company in Nigeria?
The first thing is to decide on a name, then perform a name availability search and reservation at the Corporate Affairs Commission.
Please note that the reserved name is valid for 60 days only.
Once your name has been reserved, you have to complete some CAC documents. These documents are: Application for Registration of a Company Form (CAC 1.1) – and memorandum & Articles of Association (MEMART)
You can see more about incorporating your business here
So to the big question…
Why should you incorporate your business?
There are limits to what you can do with a business name and importantly there are limits to the advantages.
If you already use a registered business name, chances are you may need to convert to a limited liability company especially if your business is growing.
Some of the advantages of incorporating your business include:
1. Incorporating your business gives you limited liability
An incorporated business is deemed a separate legal entity from the owner or the individuals running it. As a result, the business can enter into contracts, own properties, request for loans as a corporate entity.
Here’s an example:
Zainab runs an event decoration outfit, “Zainab Decorates Limited”.
In other to expand her business, Zainab Decorates Limited took a loan of 5 million naira from some lenders. Due to some unforeseen circumstances, the company could not meet up with the payment date.
The creditors are willing to sue Zainab but they can only sue the company and not her. The reason is simple. Zainab cannot be sued in her personal capacity to recover or repay the debt.
A business name does not work the same way. Zainab is one and the same with her events management outfit and therefore she will be personally liable.
Running a business is hard enough. But going bankrupt and losing all your savings is completely unnecessary.
Incorporating your business assures you that your risk is limited to the business alone.
There are exceptions to this rule, but generally, that is how it works.
2. Continuity of the business
An incorporated company does not come to an end because the founder or business owner is no longer involved in the business.
As we established above, your incorporated company has a legal identity of its own. Therefore entering into contracts or agreements with other companies is doing so as a separate legal entity.
It is completely normal for the directors or even the owner of a company to change over time, incorporating a business ensures the smooth continuity long after the departure of the current set of directors or founders.
For businesses looking to raise funding, due diligence has to be carried out and one of the core assessment is the risk management.
What happens to the business when Zainab is no longer involved? and subsequently what happens to my investment/involvement in the business?
On the less dire side of things, we are looking at important day to day activities like who signs a check when the founder is not around who attends what meeting with the board and shareholders.
3. Incorporating your business avails you the opportunity of raising funding
As a business owner, you have dreams. Dreams of how big you want your business to be, expanding into other countries, making acquisitions, beating the competition, executing faster and smarter… all of which require capital. Capital most businesses simply do not have.
And so they turn to investors to raise funding. There are two basic ways of doing so… debt and equity
For debt, both business structures, actually all business structures should be able to raise funds this way. Request for a loan and pay back with interest at a specified date.
Equity, however, is an option not available to sole proprietors. Equity is to give an investor a number of shares for putting money in your business.
To raise capital, an incorporated company issues new shares. These shares are either offered to existing shareholders, new investors or in the case of public limited companies, the entire public.
4. An incentive for the first set of employees
Running a successful business rests on being able to get the resources you need.
In the case of skilled employees, you are looking at a lot of high repetitive expenses. And for a new company that could pose a problem.
An incorporated company allows you offer your employees equity in your business. This works to your advantage in two ways:
- You don’t have to think about paying a huge sum of money…for a while anyway. Owning a bit of the business is bound to satisfy them for a while. They are willing to accept little payment secure in the knowledge that they have a piece of your business
- They work twice as hard. There is a different vigour and dedication to the business when they own a part of it. You do not have to do too much motivating them as they will do everything possible to ensure their business succeeds.
5. An incorporated company makes it easier for you to exit the business
20 years down the road, do you see yourself still running the same business?
If your answer is yes, great. If no, still great.
As a shareholder of the company, the other shareholders can choose to buy out your shares thereby providing you with a clean exit and hopefully loads of money.
So wondering what the next step is and how to incorporate your business? We’ve simplified it for you. Start here