Business & Legal Checklists In Starting A New Business
Starting a business or enterprise in a depressed economy can be overwhelmingly discouraging if the passion and conviction are not harmonised and properly kept in focus. Wealth creation addicts agree that the ownership of one's business is essential to economic independence and possibly, to prosperity if the opportunities of the business are properly harnessed.
Also very important when considering starting a business are informed business and legal factors, which influence a successful business. I have tried to provide you with a working checklist on business and legal factors to consider when electing to start a business and seek professional advice for this process.
Legal Checklist on Starting a New Business
A successful enterprise must expend a lot of time on business research and development. This is because a new business is very similar to a sports athlete who will only excel on competition day -- profit sharing day for the businessperson -- if he, she or they train for weeks and months before the event.
In deciding whether you require additional training or professional qualifications before starting your business, you must also keep a close watch on the type of legal structure that will best suit and advance your business. Lawyers “feast” on businesses that do not do their due diligence -- legal and business -- before opening shop.
In most common Law countries, there are three main types of businesses. They are:
I will share with you under the following sub-heads the advantages and disadvantages of each type of business to assist you further.
Liability of members of different business models
The primary advantage of a Sole Proprietorship is that the sole owner takes all the profits and does not share it with anyone unless he chooses to. The primary disadvantage is similarly that he bears all the losses, in case of one, as there is no shield for him. In contrast, a business with partners shares the profits and loses together.
In the case of a limited liability company, the company is separate and distinct from its Shareholders. The liability of each Shareholder is limited to the value of the shares allocated to him/her/it and for which no payment is received by the company before the loss arises and the company is unable to pay it or them.
Number of Members
Sole Proprietorship consists of only one person. A partnership on the other hand is only permitted to have a minimum of two partners and a maximum of 20 members unless its business is that of Legal or Accountancy professional practice. A private limited liability company is allowed to have a minimum of two Shareholders and not more than 50 Shareholders whilst a Public Limited Liability Company has unlimited number of Shareholders but also a minimum of two Shareholders.
The advantage in the number of members that a company has includes the sharing of profits, losses, business experiences and expertise, contacts, etc.
The borrowing power of a Sole Proprietor is usually limited to the credit worthiness of the Sole Proprietor. Also, the risk level is greater for the Lender as there is always the concern that should the Sole Proprietor develop a aliment as small as a cold, the credit facility may be in danger. This is in marked contrast with other forms of business mentioned above.
Registration Formalities & Costs
The registration formalities for a Sole Proprietorship and Partnerships are much simpler. Key information that your Solicitor will request for from you include (1) the proposed name for the enterprise. (2) The nature/objects of the new business. (3) The names, addresses and passport pictures of the proposed Proprietor(s). The time line for registration can be as little as one week and at nominal costs. Also, based on the present procedure, you can elect not to retain a private Solicitor and undertake he registration yourself.
In contrast, the registration of a limited liability company is more cumbersome and expensive. A limited liability company must have a minimum share capital of N 10,000 (Ten Thousand Naira) for a private company and N 500,000 (Five Hundred Thousand Naira) for a public limited liability company. Where the company intends to have some foreign participation, it is advised that its start-up share capital should be between N 2Million and N 5Million, as this will determine how many expatriate quota positions will be allowed to the company.
The timeline for commencing registration and obtaining a certificate of registration is an average of three to five weeks if nothing goes wrong at the Corporate Affairs Commission Registry.
A Checklist you should have answers for before instructing a Solicitor includes (A) the proposed name of the Company. (B) The kind of enterprises that the proposed business will undertake. (C) The share capital, Directors, Shareholders, registered office of the company, etc. Note that the name of an enterprise is very important as it indicates its identity and niche. A Company must also not have a name that is already in use by another company.
The average costs of registering a limited liability company excluding a Solicitors professional fees include (i) stamp duties of 1.25% of the nominal share capital of the company to be paid to the Federal Board of Inland Revenue (FBIR). (ii) Filing Fees is 0.5% of the nominal share capital of the proposed company payable to the Corporate Affairs Commission. (iii) Certified true copies costs of about N 10,500 for the particulars of Directors, Shareholders and the company's Memorandum and Articles of Association.
Capacity To Sue & Be Sued
A limited liability company can only be sued or sue in its own name. The Shareholders are not directly placed on the firing line of a litigation. In contrast, members of a partnership or a Sole Proprietor usually bear direct liability and responsibility for any litigation that is commenced against them.
In also deciding on the type of business medium you want to start with, it is recommended that you pay attention to the tax obligations of each kind of business. For example, the tax liability of a Sole Proprietor or Partnership is direct to the Owners and the tax allowances/savings available to them are nominal. On a graduated basis, a Sole Proprietor or Partner's tax liability can amount to a graduated percentage of 25% of profits Whilst a limited liability company though pays an average of about 32% in Companies Income Tax, Education Tax, etc the allowances for the company are more as is the management of the tax liability. Consult a tax consultant for more advice on this.
Reasons Why Start-Up Businesses Fail
In addition to not complying with some of the above matters, some businesses fail because of:
In conclusion, I encourage you not to give up. Take encouragement from the words of the famous American basketball player, Michael Jordan, who said that he would never regret failing but would always regret not trying where he fails to try.
DISCLAIMER: This Newsletter is a free educational material, for general information ONLY. Recipients are adviced to seek legal counselling to specific situations when they arise. Comments, criticisms, suggestions, ideas, etc are always welcomed. This Newsletter may be shared with other parties (third parties) provided the author is acknowledged as the originator of the article contained herein and the disclaimer notice is attached.
EHIJEAGBON O. OSEROGHO