One of the biggest factors that hinder entrepreneurs from incorporating their businesses is the cost. As a result of this, most startups are just registered as business names. It is easy to see the rationale: you are just starting out with the sole aim of raking in profits and you don’t have so much capital to “throw around”. However, incorporation serves your best interest in the long-term. Whatever benefits you think the registration of the business name gives you are peripheral and short-term. You will realize this as we step further into explaining the legal and economic advantages of company incorporation.
An incorporated company has its own identity separate from the person(s) who is the owner(s). The company is a corporate entity that is distinct from its directors and shareholders. It can enter into deals and make agreements. Any negative or positive fallout of such deals and agreements is borne by the business and not the individual directors or shareholders except they decide to act as guarantors in the process of striking the deal. That is the law of company incorporation in Nigeria – put in the context of practical situations. If what you have is a registered business name, then you should know that there is no distinction between the business and the owner(s). The first scenario encapsulates the concept of limited liability. The risk associated with running the business is seriously mitigated when you decide to incorporate your company.
In the same vein, the continuity of an incorporated business venture is assured. The reason is that it has its own distinct entity. You can assess the risk profile of any business by taking even a cursory look at its continuity structure(s). Incorporated companies are bigger than any single individual – directors and shareholders included. As a result of this, they outlive the founders or shareholders or directors. It is possible for a shareholder to sell his or her shares to interested person(s). This means that directors or shareholders can change from time to time. It is important to know what the fate of business will be in an event of the death or incapacitation of its owner(s) or manager(s). A business that is only registered with a business name technically operates as a private business. Upon the death of its founder or owner it stands a great risk of being treated as one of his possessions. All of these factors play a key role in decisions of third parties to do business with companies that are not incorporated. Just like third parties, employees are very careful of working in organizations that are highly prone to winding up on the day the owner(s) die. An incorporated company ceases to exist under certain conditions in the Nigerian constitution, all of which ensures that the interest of shareholders, existing customers and employees are protected.
Furthermore, it is common for many startups not to have enough capital to hire employees with the requisite skillset and competence to run the business or company at the initial stage. What incorporated companies do is to offer equity to such skilled workers. That automatically makes them shareholders in the business. They can now settle for the little remuneration because they know that they stand to gain a lot once the business becomes profitable. A business that is just registered does not have shares. Such business cannot also give equity. Hence, they cannot take the option explained above in trying to bring in highly skilled workforce.
On a similar note, an incorporated company can be sold by the owner or shareholder and the business will run smoothly. Registered businesses tend to end with their owners. The initial owner of an incorporated business can easily retire without any hassle as the business continues to run.
If you are planning to start up a business in Nigeria. It is wise you incorporate your company.