Ever wondered what differentiates a business name registration from a Limited Liability Company Incorporation? Read this profound article by Starterbag Business Analyst Moses Bassey
It has been our experience with entrepreneurs across the country regarding which form of business registration to do and why. Many are unclear as to the differences between these two form of business registration: Business name (entreprise) and Limited Liability Company. The choice of a particular form may depend on factors such as scaling (becoming a big player), cost, returns, structure, unique identity etc. Being aware of the peculiarities of the different forms will help to inform in making a better decision and which serve long-term benefits.The choice of a particular form may depend on factors such as scaling (becoming a big player), cost, returns, structure, unique identity etc. Click To Tweet
Let’s Define Some Terms
Business name registration, also called enterprise or venture is the registration of a trade name for purposes of business. In other words it is a title under which a sole proprietorship or a partnership carries out its business. It gives the business a unique identity through the different combination of words and symbols. It provides a legal backing for the business. However, the law doesn’t see it as a separate entity but a single entity – one and the same with the sole trader or partners.
A clear example of business name registration is when a certain trader let’s say by name “Elijah Eno” decides to formalize his business. He trades in automobile spare parts and puts forward the name “Elino Auto-Services” for registration. He can, therefore, trade in this name, issue receipts, invoices and other official documents.
Limited Liability Company
LLC is the acronym for limited liability company often denoted as (‘Ltd’ as in Elons-Mega Ltd) in Nigeria. LLC is the incorporation of a separate legal entity to conduct business. At the completion of the registration, a new entity is created in the eyes of the law. An entity (a legal individual or being) separate from its owners – shareholders. It can sue and be sued. This means that the owners are shielded in the event of any unforeseen circumstances in terms of liability as far as there is no claim that they intentionally rigged the business. An LLC can choose to register a business name to serve a particular business line it has interest in. Therefore business name (enterprise) can be registered by an individual (sole proprietor) or by an existing limited liability company.
Structure and control
In an enterprise, the proprietor or in the case of partnership, the partners have full control of the business. But in an LLC, control is via the board or as per the shareholdings held by the shareholders. In an LLC, decisions are usually more complex compared to enterprise or business name. However, the owners can decide that it doesn’t need a board, this may lead to quick decision making but this depends on how big the company is or wants to be.
In LLC registration, the CAC requires the issuance of authorized share capital or nominal share capital i.e a stipulated number of shares a company is to issue at incorporation. Remember in LLC, ownership is based on shares, the larger an individual’s share, the larger his stake in the company especially with regards to dividends and decisions but also risk. For instance, Henshaw and Orok decides to start a company with an authorized capital of 1 million naira at 1 naira per share. Let’s say Henshaw provides ₦600,000. Automatically he owns 60% of the company, while Orok owns 40% of the company if he provides the remaining ₦400,000. In the event of any unforeseen circumstances, and the company liquidates or is to pay damages, Henshaw will lose only the ₦600,000 he invested as well Orok (his ₦400,000 invested) but their personal property will not be touched because the business is separate from them. Only what was acquired in the name of the company will be taken. The risk is higher for Henshaw because of his shares but at the same time he would enjoy higher dividend and control. This is not the case for business name. In business name, the proprietor or partners suffer the losses even to their personal property.
Private Limited Liability Companies do not issue shares to the general public but public limited liability company can do that. The law only permits Private LLC to sale shares to certain individuals not the general masses as in when a company publicly announces and allows anyone, anywhere the right to purchase its shares.
Compared to business name, the death of the proprietor brings the business to an abrupt end, but in LLC, the death of a shareholder or director doesn’t affect the life of the business. The company perpetuates to other generations. It better fulfills the going-concern principle which assumes that a business will continue to operate in the foreseeable future. There are certain creditors and banks that won’t trade with businesses that don’t have a “going concern” because of the risk involved.
LLC costs a little bit more to register compared to business name registration about 50% higher. The price differs based on how the entrepreneur goes about the process. An entrepreneur may even incur more cost because he is unaware of certain things and probably fall into the hands of extortionist.
LLC takes a slightly longer time to complete because it involves several other things that business name doesn’t require. On our platform (starterbag.com), we deliver at a convenient period of within 14 working days for LLC, compared to enterprise which is within 10 working days. A business name is simpler to register and requires just a proprietor or two or more partners, meanwhile for LLC, the entrepreneur must provide a minimum of two shareholders but can appoint directors and managers to run the company. Regarding documentation, LLC requires the preparation of Memorandum of Association and Article of Association (often denoted as MEMART).
Taxes and returns
Taxes are paid to the Federal Inland Revenue Service while returns are made to Corporate Affairs Commission. Both are done annually. Payment of taxes is one key factor that make many entrepreneurs shy away from LLC. They often feel that LLC pay more taxes to Federal Inland Revenue Service while Business name doesn’t require such. However, every business is required by law to get a Tax Indentification Number (TIN) and register to pay taxes on an annual basis. These taxes can range from 20 to 30 percent of your profit. Payment of taxes is can go a long way to define how reponsible a business is and can affect your relationship with other businesses and government regulatory agencies. Concerning returns, enterprise will make returns to the CAC after 18 months of registration at a paltry sum of ₦1000 every year. Meanwhile an LLC will make returns within the range of ₦3000 – ₦5000.
Growth & Expansion
LLC enjoys more in terms of possible growth and expansion. An LLC is more recognized than a business name. Established and big corporations and even the government will readily hand out contracts to LLCs because it has the capacity and perpetuity to fulfill certain obligations.
When it comes to business name, the enterprise can be exploited in this regard. For instance, a rival having seen that Elino Auto-Services has a strong goodwill in the marketplace, can decide to register it as a company and then proceed to make it a trademark. Elijah Eno will not prevail at the court if the rival sues for infringement, the rival may due to the circumstances coarse Elijah Eno to sell his business because of the leverage it possesses.
I have endeavoured to provide a comprehensive view of the two forms of business registration readily available to entrepreneurs in Nigeria, which one will you go for? Business name registration or limited liability?