22/02/2023
Understanding the difference between business name and company limited by shares as a Nigerian Business owner
Making your business legal is a big step in your growth journey as a business owner. In a lot of ways, it signifies that the business stands on its own without the many limitations of it being tied to you. Business owners choose to register their businesses for numerous reasons some of which include:
Get Investors
It’s not possible to get legit investors without having a legit business. You build trust and credibility if you are looking for investors to join your business.
Loans
An essential part of loan applications is business registration. Without it, you will be unable to secure loans to grow your business.
Grants
Certain business grants are available year-round for small and medium businesses. To avoid fraud, most grants require proof of business registration.
Trust
Having your business registered builds trust with your customers as they are assured that you are not a scam.
Business account
Business registration allows you to open a business account which means you can separate your finances from that of your business.
For some businesses, a business name registration is the way to go and for other businesses, you need to get registered as a private company. In this article, we would be breaking down these two routes to getting your business legal and opening your eyes to which would work for you.
WHAT IS A BUSINESS NAME
Registering a business name simply means getting legal recognition of a name other than your name. This name recognized by law is what your business will be known as. For example, Mr Duke Ololo runs an electronics store, and when he wants to register his business name, he can register Cavemen Electronics. Once he registers this name, nobody else can use it.
WHAT IS A COMPANY LIMITED BY SHARES or LTD
While there are several types of companies. A private limited company is easily recognizable because it is the type of company that ends in "Limited" or "LTD"
But what does this kind of company mean? A private company limited by shares (LTD) means a company formed by a minimum of one person and a maximum of 50 where the liability (how much they are obligated to pay in the event that the company has debts or is closing down according to provided legal steps) is limited to the contributions made at the time the company was set up.
ADVANTAGES OF A PRIVATE COMPANY LIMITED BY SHARES (LTD)
Liability- In an LTD, the liability of the shareholders is limited to the shares they own. This means if the company falls into debt, the debtors cannot demand that the shareholders use their personal assets (cars, real estate, cash) to settle their debt.
Continuity- The existence of a company is not determined by its shareholders. Even when the shareholders die, the company will continue to exist.
Personality- Under the law, the company is regarded as a separate legal entity meaning that it can sue or be sued in its own name.
Process- All the activities and processes of a private company are governed by the articles of association and the Companies and Allied Matters Act 2020. This gives investors confidence knowing that it is properly regulated by law with checks and balances.
ADVANTAGES OF A BUSINESS NAME
Ease- A business name can be registered quickly with only a National identification number, signature and passport required to register a business name. Kippa Start allows you to conclude this process in days and get a certificate via email without stress.
Cost- A business name registration is relatively cheap and affordable.
Control- There is no requirement to have a partner in order to register a business name. A sole proprietor can register a business name alone giving such an individual total control over the operation of the business and also access to all the profit.
No formality- Running a business name does not require formalities such as meetings mandated by regulatory agencies.
Conversion- A business name can eventually be converted into a private company allowing the business to grow at its own pace until it is ready to convert.
WHAT ARE THE DIFFERENCES BETWEEN A BUSINESS NAME AND A COMPANY LIMITED BY SHARES (LTD)
LEGAL STATUS
A private company limited by shares (LTD) is a separate legal entity. This means if there is a legal dispute where parties have to go to court, the company can sue and be sued. Effectively, it is a separate person.
A business name does not have this legal status. In instances where there is litigation, a business name can only sue or be sued under the name of the business owner(s). For instance if Mr Duke Ololo in our previous example is being sued, it will be “ Mr Duke Ololo trading under the name and style of Cavemen Enterprises" You cannot sue "Cavemen Enterprises" directly.
TAXATION
A private company limited by shares (LTD) is required to pay Companies Income Tax and other relevant taxes to the Federal Inland Revenue Service(FIRS). However, if such a company has a turnover (This is your gross revenue or income before you deduct things like marketing costs, rent, salaries e.t.c) below 25 million it will not be required to pay Companies Income Tax.
A Business name on the other hand is not required to pay Companies Income Tax. The owner is only required to pay taxes on their income as an individual.
LIABILITY
The liability ( your financial obligations/ the amount you are required to contribute to the business entity) is also another distinguishing attribute between a business name and a company.
In a private company limited by shares (LTD), the liabilities of the shareholders are limited by the number of shares they take on when the company is being formed. This means that if the company is being wound up (the company is being shut down) or the company has debts, all they will be required to pay is the value of shares that they took when the company was being formed that have not been paid.
A debtor cannot go beyond that to request that the personal assets (cash, real estate, cars etc.) of the shareholder be used to settle any debt of the company.
However, if a registered business name incurs debt or is declared bankrupt ( unable to meet its financial obligations) then the debtors can sue to recover the debt from the personal assets of the business owner.
DOCUMENTATION
A registered business name receives a certificate of registration of business name while a private company limited by shares (LTD) receives a certificate of incorporation. Both documents are issued by the Corporate Affairs Commission.
MEMBERSHIP
In terms of membership, a company limited by shares is required to have a director(s) and shareholder(s) while a business name is only required to have a sole proprietor or partners (proprietors).
A company limited by shares has the capacity to accommodate a maximum of 50(fifty) shareholders while a business name is limited to a maximum of 20 partners except for law and accounting firms.
FUNDING
A company limited by shares can secure funding by selling shares to private investors. A business name does not have shares it can issue. It is generally funded by the owner with opportunities to take loans from financial institutions or family and friends.
DISSOLUTION
A business name is automatically dissolved ( it ceases to exist) when its founder dies unless there are other partners available to carry on the business.
However, a private company limited by shares (LTD) is not affected by the death of its shareholder. In the case of death, the operations of the company will continue to be run by the other shareholders or directors of the company.
If the company has a single shareholder or director then the family of the deceased can take over the company and appoint a new director by applying for a letter of administration or probate from the court.
This is because, under the law, a company is its own person and can only be dissolved by following a process laid down by the law. The death of a shareholder or director is not the death of the company.
CAN I CONVERT MY TYPE OF BUSINESS AFTER I REGISTER?
Yes, you can.
A private company limited by shares (LTD) can be converted into a public limited company (PLC). A business name on the other hand can be converted into a private company limited by shares (LTD).
CONCLUSION
The two routes to making your business legit that have been explored in this article serve different needs. Before making a decision, it is important to understand the unique benefits of each one, the current needs of your business and your future growth plans.
