Forms of business organisation in Nigeria
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Business enterprises in Nigeria has deferent legal form that entrepreneur can choose in from. While there are four forms of business organization entrepreneur should know and chose carefully because it is easy to opt in for one than transit to another.
A form of business is about ownership, legal framework, ownership, management size and financial.
Whatever forms you chose it will make or mar your business so know your business and industry in and out before choosing any forms and not only that know all the advantages and disadvantages of the forms of business you want to choose, well that is the purpose of this article to show you different forms of business and their merit and demerit but before we go into the details I will like you to take not of the following.
Question you must answer before choosing any form of business in Nigeria
Will the business be owned by one or many?
Where do you see your business in the next five years?
Is it per time business or full time?
Will the business require loan or investment?
How the growth rate will look like, faster or slow?
Will the business s require large number of staff?
After answering this question the next is to look into consideration, this might not affect your business instantly but in the long run it could be a stumbling block.
Below are the factors you must put in to consideration before choosing any form of business
Some form of business like private and public corporation can maneuver their way to pay small tax compare to their revenue which is not possible for other forms of business
Sole proprietorship and partnership form of business pays with their personal income if business goes into debt while cooperation owner are free from personal liability instead indebted corporation properties will be sold if it goes into bankruptcy.
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Startup cost and future cost
In corporation owner can provide seed capital in the initial stage of the business but the future require capital will be borne by the investors, other form of business is not like this.
Cost of formation
Forming corporation is costly and could be tiresome; usually it will take 10 to 20 days to incorporate a company while it will only take between 2 to 7 days to register other forms of business.
This should not be overlook; it is a critical decision that will affect you and your company in the future.
Do you plan to pass the seat of CEO to your child in the future? If yes do not near corporation.As it is harder to that, in fact succession will be decided by the board.
Skill and Ability
Forming big business like corporation may not be hard initially but as the company grows it will require great effort from the CEO.
Can you leave everything for the business?
Can you sleep late because of the business?
Can you give up your social life? If no, do not form a corporation.
I’m sure you are cleared about what you need to know before forming a business, it is time to go into detail of each form of business in Nigeria
Form of business organization in Nigeria
Sole proprietorship form of business
This is a popular form of business in Nigeria. It is common among women who rely on shop to sell their goods and services.
Sole proprietorship form of business simply means one man business. The cost of production is borne by one man, he or she is the Alfa and Omega of the business, every decision is made by him or her.
If the business for whatever reason goes into bankruptcy the owner will pay with is personal income, there is no escaping it.
Source of capital for sole proprietorship
- Personal savings
- From family and friends
- Loan from banks
- Trade credits
Advantages of sole proprietorship
Easy to form and close up
All the profit goes to the owner
All the decision is made by the owner
It can be easily pass to family
Little or no government regulation
Disadvantages of sole proprietorship
- It is hard to secure loan or investment
- The business is likely to end with the owner’s death
- The owner income will be affected if the business goes into debt
- There is chaos in the management structure and chain of command
Partnership form of business
Partnership is the improve form of sole proprietorship. Partnership form of business is an association between two or more people who pool their skill, capital and resources together to form a business and also to share the profit.
Partnership is a good form of business if it is form with good people but a regrettable experience if form with bad people.
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Form a partnership with people you know very well to avoid problem which can crumble your business. Assign role and responsibility before forming partnership, let who will be CEO, CTO, CFO, know and distribute capital between the partners.
Formation of partnership
Though partnership can be formed with a word of mouth, you shouldn’t do that, write all the agreement down and make sure individual sign and have their own copies.
The agreement form for partnership is called deed of partnership and it contain the following
Names of partners
Capital to be provided by individual
Signatories to the account
How profit will be shared
Role and rights of individual
Nature of the business
Method of admitting new partners
Circumstances/event that can dissolve the partnership
Advantages of partnership
It is easy to form
It is easy to acquire capital
It is flexible
Reduction in risk
Partners can specialize in one area of the business
Disadvantages of partnership
Partners have unlimited liability
Conflict may arise between partners
Difficulties in management
Action of one partner can affect the other
Types of partners
These are partners who participate in the day to day activities of the business
These are partners who do not participate in the day to day running of the business.
These are other business or company who allow their name or logo to be use. They are not entitle to any profit.
These are executive who manage the company e.g. CEO, CFO, CTO.
These are partners who do not participate in the affairs of the company, they only provided capital and also liable to pay dept.
Sources of capital for partnership
- Bank loan
- Trade credits
- Admission fee of new partners
Dissolution of partnership
Partnership can be dissolved based on the clause stated in the deed of partnership, usually it is because of the following reason
- Bankruptcy of the company
- Expiration of agreement
- Death of a partner
- Joint decision
- Government verdict
Corporation (Limited Liability Company)
In this form of enterprises business or company is separated from individual – it is a legal entity.
It is the form of business to choose if your intention for your business is to take it public or make it big. It is costly to form and often time consuming.
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Anyway if that what you want, surely you can go for it. Another thing, corporation require board of directors and the ownership must be more than one. Know that It is easier to go into corporation than to transit to another, so think well before choosing it.
Differences between two type of corporation
Private limited liability
- Difficult to transfer share
- Owner must be between 2 to 50
- It share cannot be purchase by public
- The name of the company end with “limited”
Public limited liability
- It share can be purchase by public
- It share can be transfer
- Minimum of seven owners
- The name of the company ends with ‘plc’ e.g. First bank plc.
Formation of limited Liability company
Formation of Limited Liability Company is strenuous, so seek out the service of a professional.
Advantages of Limited Liability Company
- Individual property or income is not affected
- There is many source of capital
- It is a legal entity, which can sue and be sued
- There is specialization in management
- It can exist for a long period of time
Disadvantages of Limited Liability Company
- Expensive to form and organize
- Heavily guarded by rule and regulation
- Conflict can arise between shareholders and management
Sources of capital for Limited Liability Company
- Selling of share
- Bank loan
- Issue of debentures
- Trade credits