Members of a limited company have liability only up to the extent of their individual investment in the company so formed.
WHY A LIMITED LIABILITY COMPANY?
Private Limited Companies are by far different from Business Names in composition, formation procedures, legal implications and company life span. A limited company can continue to trade despite changing its directors and shareholders unlike a Business Name which usually dissolves after the death of the sole proprietor or partner. As earlier noted, private limited companies have indeed become more pronounced and have become the toast of prospective business owners and investors for a myriad of reasons.
First, is the “limited liability” clause. A shareholder in a private limited liability company can share the loss of the company so formed only up to the extent of his direct investment in the company. But, a sole proprietor may lose all (including his personal estate and direct contribution to his business) in the event of loss, liquidation, court injunction and debt. The personal assets of the sole proprietor, even if unconnected with the business, can be applied in meeting the obligations of the business. However, the directors of a private limited company are only liable if they continue to trade and incur liabilities after it becomes apparent the limited company is insolvent. Hence, in forming a private limited company, you may need to separate your personal assets from your company assets, making each one assume a separate legal entity. This is ideal if your landed property which is also your business location is your registered business address.
Secondly, a private limited company enjoys some level of reputation from buyers, suppliers, financial institutions and investors over and above the sole trader by reason of a more formal approach in the limited company’s administration and management. A sole trader basically pleases themselves with regard to the administration and management of the business. A company director is responsible for adhering to company administration according to statutory regulations in regard to both the limited company accounts, statutory books and management as stated in the articles of association. The duties of a director are more formal than a sole trader. By law, can offer its company shares for sale by way of private placement in order to raise more funds to grow and expand the company. However, one of the major disadvantages of this type of structure is that the tax burden on individual members is higher since the company is subjected to corporate tax while the individuals still suffer tax on their share of earnings by way of dividend.
Statutorily, the Companies and Allied Matter Act (2004) of the Federal Republic of Nigeria, provides requirement for people wishing to come together to form a company. “An individual shall not be capable of becoming a member of a company if he is of unsound mind and has been so found by a court in Nigeria or elsewhere; or he is an undischarged bankrupt. A person under the age of eighteen years shall not be counted for the purpose of determining a legal minimum number of members.”
The question now is, “How can a private limited company formed or incorporated in Nigeria?” Having been directly involved in business registration matters for more than a decade now, this author can adequately say that company formation procedures begins with engaging the services of an accredited specialist – lawyers, chartered accountants or chartered secretaries accredited by the Corporate Affairs Commission (CAC). Also important is: deciding on a suitable name, and submitting such a name, for approval and reservation at the CAC. Once your proposed name has been approved and reserved, then more important aspects of the company formation process can continue. The bureaucratic hurdles involved in such registration process include: Preparation of the requisite incorporation documents and payment of the stamp duty. Registration requirements are more complex and the cost of registration much higher than for sole proprietorship or partnership. The duration for completing incorporation for a private company may be 10 working days or less.
MEMORANDUM OF UNDERSTANDING & ARTICLES OF ASSOCIATION
A certified copy of the Memorandum of Understanding & Articles of Association is some of the documents that accompany your certificate when your company is finally duly incorporated. This document, among other matters, shows the name of the company so formed, amount of share capital, objects of the company, and the names of the subscribers and number of shares allotted to each of them.
One of the questions usually on the lips of people who want to incorporate a company is, “what does ‘Share Capital’ mean, and why a 1 million share capital is common.” The issue of Share Capital raises the question of how strong the company is and the worth of the company in monetary terms. Shares mean the amount of rights you own in a company. The minimum share capital popular is 1 million Nairas. But for Nigerian companies owned by foreigners, the minimum share capital is 10 million Nairas. Besides, a 1 million share capital is only nominal, and you don’t need to have 1 million naira in the bank before you incorporate a 1 million share capital company although, statutorily, it is expected that 25% is invested in cash or equipment.
If you own 500,000 worth of shares in a 1 million share capital company, it means you own 50% of the company. There are some companies that the CAC statutorily specifies for a higher minimum share capital when registering them – Banks, Insurance Companies, Travel Agencies, Broking firms, Security Agencies, Registrars, Bureau de’ Change, Forex Companies, etc. Authorized share capital is also referred to, at times, as registered capital. It is the total of the share capital which a limited company is allowed (authorized) to issue. It presents the upper boundary for the actually issued share capital.
FILING OF RETURNS
The law requires every company (including a company granted exemption from incorporation) to, at least once in every year without notice or demand, make and deliver to the Board a return in the forms of: (i) The audited accounts, tax and capital allowances computations and a true and correct statement in writing containing the amounts of its profits from each and every source; (ii) A declaration which shall be signed by a director or secretary of the company that the returns contain a true and correct statement of the amount of its profits computed in respect of all sources and that the particulars in such returns are true and complete.
• For newly incorporated companies, the submission shall be within eighteen months from the date of its incorporation or not later than six months after the end of its first accounting period, whichever is earlier.
• For Existing Companies – companies that have been in business for more than 18 months – the submission shall be not more than six months after the close of the company’s accounting year. Filing early returns is profitable.
One of the neglected issues in company formation is the area of the Company Secretary in the private (or public) company – either during or after incorporating a company. A Company Secretary is a senior position in a private or public sector company, normally in the form of a managerial position or above. Sections 293 (1) of the Companies and Allied Matters Act of 2004 expressly states that “every company shall have a secretary.” Despite the name, the role is not a clerical or secretarial one in the usual sense. The company secretary ensures that an organisation complies with relevant legislation and registration, and keeps board members informed of their legal responsibilities. Company secretaries are the company’s named representative on legal documents, and it is their responsibilities to ensure that the company operate within the law. It is also their responsibility to register and communicate with shareholders, to ensure dividends are paid and maintain company records, such as list of directors and shareholders, and annual accounts. As stated by Section 295 of the Company’s Act, it is the duty of the directors to take all reasonable steps to ensure that the Secretary is a person who possess requisite knowledge and experience to function in such capacity. This means there are no specific qualifications required of a Secretary of a private company. Section 295 of CAMA provides that the Secretary of a public company must have one of the specified qualifications. Under the aforesaid section, the Secretary of a public company must be any of the following: (a) A member of the Institute of Chartered Secretaries and Administrators; or (b) A Legal Practitioner within the meaning of the Legal Practitioners Act 1975; or (c) A member of the Institute of Chartered Accountants of Nigeria or of such other bodies of Chartered Accountants as are approved from time to time by an Act or Decree; or (d) Any person who has held the office of a Secretary of a public company for at least three years of the five years immediately preceding his appointment; or (e) A body corporate or firm consisting qualified persons under paragraphs (a), (b), (c) or (d).
In conclusively, there are myriads of issues that relate to this type of business structure. It’s best you consult an accredited professional to advise you appropriately.