Introduction
This article sets out to examine an aspect of social control through law identified by Farrar and Dugdale, and modified by Professor Summers, namely, the constitutive technique. This technique of social control sums up the jurisprudence underlying the formation of Companies, Partnerships, Sole proprietorships and even SPVs. It provides the ideological substructure for the creation of legal persons and frameworks, and in Nigeria this technique finds precise legislative manifestation in the Companies and Allied Matter Act 2020 (CAMA 2020).
The Companies and Allied Matters Act 2020 sets out several legal frameworks for the formation of businesses, while leaving it out for individuals to elect what framework they may adopt for their business.
This article shall be, particularly, explicating the various business structures available for the formation of businesses.
Brief Overview
Many make the syllogistic mistake of conflating a business to mean a company and thus, many prospective business owners erroneously believe that they must incorporate a company in order to start a business and therefore, fail to give careful consideration to the business structure which is optimal for their business requirements; it is therefore important to understand what corporate structures exist.
As already established, the law guiding the establishment of a business in Nigeria is the Companies and Allied Matters Act, 2020 (CAMA 2020). It is a comprehensive piece of legislation which regulates the formation, incorporation and management of business organizations. The Corporate Affairs Commission (CAC), is the autonomous body charged with the responsibility of administering the CAMA. The CAC is empowered to undertake activities necessary or expedient to give full effect to the provisions of the CAMA.
Types of Business Structures
In accordance with the provisions of the CAMA, business activities in Nigeria may be undertaken through any of the structures outlined below. Each of these structures have peculiar identities and characteristics to suit the purpose of certain types of business:
Sole Proprietorship
A Sole Proprietorship is easy to set up and is usually adopted by small businesses. It is a common and cost-efficient business structure. Here, the owner is the sole decision maker, bears all the risks and liabilities, and is also responsible for all the profits and losses of the business. This business structure is best suited to individuals wishing to run their businesses alone and exercise sole control over its activities.
A sole proprietor may choose to register their business/trading name with the CAC; or may choose not to, particularly when the name of the business is:
(i) the sole proprietor’s surname;
(ii) the sole proprietor’s surname and the initials of his/her forename; or
(iii) the sole proprietor’s full name.
However, if the sole proprietor wishes to register the business, the sole proprietorship is to be registered as a business name with the CAC, within twenty-eight (28) days of commencement of the business.
Partnership
A partnership is composed of at least two (2) persons and at most twenty (20) persons (except for co-operative societies registered under law; and partnerships for the purpose of carrying on the practise of accountancy and law) who contribute resources together to establish a business with the main goal of sharing a profit. The partners bear the risk and liabilities of the business and share the profit of the business among themselves.
There are three (3) main forms of partnership recognised under Nigerian law, namely, General Partnership, Limited Partnership and Limited Liability Partnership.
(i) General Partnership: In a general partnership, the profit and loss are shared equally among the partners. These partnerships are primarily governed by the Partnership Laws of the various States of the Federation in which the partnership resides. Their names may be registered as a business name with the CAC, within twenty-eight (28) days of commencement of their business operations.
A general partnership need not be registered with the CAC if its name comprises:
(i) the full names of the partners;
(ii) the initials and surnames of the partners;
(iii) where the partners have the same surname, their surname with an “s” added at the end of the surname.
(ii) Limited Partnership (LP): Limited partnership comprises one or more persons called general partners, and one or more persons called limited partners. The general partner(s) bear the debts, liabilities and other obligations of the partnership; while each limited partner at the time of entering into the partnership contributes, or agrees to contribute, a sum or sums as capital or property valued at a stated amount and is not liable for the debts, liabilities and other obligations of the partnership beyond the amount contributed or agreed to be contributed. A partnership carrying on business as a limited partnership must be registered as such with the CAC. Any entity which purports to be a limited partnership and is not registered with the CAC will be deemed to be a general partnership and every limited partner in such a business will be deemed to be a general partner. Section 802 of the CAMA 2020 provides that the name of a limited partnership must end with the phrase “Limited Partnership” or the acronym “LP”.
(iii) Limited Liability Partnership: A limited liability partnership (LLP) is a corporate body with a separate legal personality from its partners. Once registered, the LLP can sue and/or be sued in its name, has perpetual succession and capacity to acquire, hold and dispose of assets in its name. Section 748 (1) of the CAMA 2020 provides that an LLP must have at least two (2) partners. Section 747 of the CAMA 2020 also provides that any individual or body corporate may be a partner in a limited liability partnership, however, Section 749(1) of the CAMA 2020 further provides that there must be at least two (2) designated partners, who must be individuals, one of whom must be resident in Nigeria. Unlike with the other forms of partnership, which are restricted to having a maximum of twenty (20) partners, there is no restriction on the maximum number of partners for an LLP.
Unlike a general partnership where the partners are generally agents of the other partners, the partners in an LLP are not agents of the other partners and each partner is personally liable for its own wrongful acts and/or omissions. The designated partners are responsible for all compliance matters including filing of any document, returns, statements or reports; and are liable (jointly and severally with the LLP) for any penalties levied on the LLP. The LLP is bound by the actions of its partners with lawful authority to act on its behalf or who have acted in the course of the LLP’s business with respect to third parties. Section 769 of the CAMA 2020 provides that partners and the LLP however have unlimited liability in cases of fraud or acts done with intent to defraud creditors or any person. The formation of an LLP is an appropriate vehicle for accountants, lawyers, doctors, architects, private equity firms, venture capital firms and other similar businesses. The LLP enjoys the flexibility and tax transparency of a partnership (personal income of the partners is taxed, however the LLP itself does not pay tax on its profits) and the benefits of a company.
Private Or Public Company Limited by Shares
A company limited by shares can be a private or a public company. This type of corporate vehicle has a separate legal entity from its owners (that is, it has corporate personality). It is a corporate structure where members of the company are personally liable for the company’s debt or liabilities only to the extent of the amount paid or to be paid for shares in the company. With a company limited by shares, the business assets of the company are separate from the personal assets of its owners, called shareholders. Sections18(2) and 22(3) of the CAMA 2020 provides to the effect that a private company limited by shares may have a minimum of one (1) member and a maximum of fifty (50) members, while section 18(2) further provides that a public company limited by shares should have a minimum of two (2) members with no limitation on the maximum number of members.
Unlimited Liability Company
With an unlimited company, the liability of its members is unlimited, therefore, the members are personally liable for the full amount of the company’s debt. For small and medium enterprises, an unlimited liability company is not the preferred form of business enterprise as the owners would be responsible for all the company’s debts. It is expedient to point out that there are only a few unlimited liability companies in Nigeria.
Company Limited By Guarantee
A company limited by guarantee does not have any shares or shareholders (like the more common limited by shares structure) but is owned by guarantors who agree to pay a set amount of money towards the company’s debts. The objectives of this form of business organisation are to promote educational, religious, sports or charitable purposes. It has a separate legal personality from its members and is not to be incorporated with the object of carrying on business for the purpose of making profits for distribution to its members.
As such, the profits of the company cannot be distributed to the members of the organisation. Section 26 (12) CAMA 2020 provides to the effect that members of the company are personally liable for the company’s debt or liabilities only to the extent of the amount agreed to be paid by the members, which shall not be less than a hundred thousand naira (N100,000). If in the event of winding up or dissolution of a company limited by guarantee, there remains after the satisfaction of all its debts and liabilities, any property, the property cannot be paid to or distributed among the members of the company, but must be given or transferred to other companies having objects similar to the objects of the company limited by guarantee.
Incorporated Trustees
Under Part F, section 823(1) of the CAMA 2020 provides that where two or more trustees are appointed “by any community of persons bound together by custom, religion, kinship or nationality or by anybody or association of persons established for any religious, educational, literary, scientific, social, development, cultural, sporting or charitable purpose they may, if so authorised by the community, body or association”, apply to the CAC for registration as a corporate body. Upon incorporation, the trustees become a corporate entity and are conferred with all the powers of a corporate entity. It is important to note that the trustees and not the Association becomes the body corporate. If in the event of winding up or dissolution of an incorporated trustee, there remains after the satisfaction of all its debts and liabilities, any property, the property cannot be paid to or distributed among the members of the Association but must be given or transferred to other institutions having objects similar to the objects of the Association.
Conclusion
In conclusion, the business of the law is not limited to punishments, sanctions and positive instructions; it pretty much covers the proactive function of providing a robust framework within which individuals may elect to make creations of their own while, not only, benefiting the wider society but, most importantly, ensuring that the existence of these creations have no inimical purport vis a vis other social elements.
It is then apparent that there exists a multiplicity of options for persons seeking to set up shop within the ecosystem, it is worth noting that these structures are more optimal for certain circumstances than others. Hence, the role of the legal practitioner in guiding the apt prospective business owner is underscored.
