Misconceptions About Company Incorporation in Nigeria

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There is a general misconception amongst entrepreneurs and startups that all it takes to incorporate a company in Nigeria is to have individuals readily available. Only a few are even aware that a corporate entity can join in the formation of a company. This lack of awareness is a limitation to the ability of Nigerians to take advantage of the incorporation process and its myriad benefits in advancing their business goals. This paper highlights below, a few misconceptions on company incorporation in Nigeria and clarifies the position of the Law.

There is no need to register a company, you can carry on your business as it is

Every business owner who desires to run a company must have it incorporated at the Corporate Affairs Commission (“Commission/CAC”). Lack of incorporation with the Commission automatically connotes that there is no company in existence. The following are the consequences of running a supposed company without incorporating it:

  1. You become personally liable for any loss of the business in the event of winding up whereas incorporation offers corporate protection to the company and limits the liability of its shareholders.
  2. Lack of incorporation will limit the chances of receiving funding from investors.
  3. Without incorporation, a bank will not provide you a corporate account to run your corporate affairs.
  4. A company may not be able to exist perpetually if it is not registered unlike an incorporated company that exists perpetually.[1]
  5. It is illegal to run some businesses e.g., business of financial institutions, without incorporation and obtaining required licenses.[2]
  6. There is no avenue for succession of the business.

Registering a company is

The cost of registering a company is affordable and not unreasonable. The statutory fees to be paid asides the payment for the reservation of names which is charged at a standard price, is dependent on the type of company and the share capital of the company. Generally, stamp duty is charged at 0.75 on every million.[3] The CAC statutory fees for a private company with share capital above 1 million up to 500 million is typically charged at 1% on the first 1 million and 0.5% on every subsequent million and the statutory fees for a private company with share capital above 500 million is charged at 1% on the first 1 million and 0.75 on subsequent millions.[4]

You can start your company with any amount

Whilst it is true that you can incorporate your company with any amount, such amount must not be below the sum stated by the CAC. Private companies must have a minimum Issued Share capital of N100,000 and public companies must have a minimum issued share capital of N2,000,000.[5] However, there are some sector-specific prescribed minimum share capital. Below are a few examples: [6]

S/N TYPE OF COMPANY MINIMUM SHARE CAPITAL(N)
1 Issuing house 200 million
2 fund/portfolio manager 150 million
3 Stock broker 200 million
4 Corporate investment adviser 5 million
5 Individual investment adviser 2 million
6 Underwriter 200 million
7 Venture capital manager 20 million
8 Freight forwarding 5 million
9 Rating agency 150 million
10 International air transport 2 billion
11 Regional Air Transport 1 billion
12 Private security company 10 billion
13 Merchant bank 15 billion
14 Commercial bank with regional authorization 10 billion
15 Commercial bank with national authorization 25 billion
16 Commercial bank with international authorization 50 billion

The company must have its share capital in cash at the time of incorporation

Even though the CAMA specifies that all the shares of the company must be fully subscribed at incorporation,[7] [8] the shares need not be fully paid up in cash at incorporation. A company’s articles of association (and shareholders’ agreement, if one has been drawn up) may state when shares have to be paid. Depending on the provisions set out in the articles or shareholders’ agreement, members may be required to pay for their company shares either:

  1. during incorporation;
  2. upon allotment (issue) or transfer after incorporation;
  3. at a specified or unspecified date in the future;
  4. when a call on shares is made; and
  5. when the company is being wound up.[9]

Any Individual can register a company

Even though individuals can register companies, not every individual can register a company. A person of unsound mind, a disqualified director,[10] an undischarged bankrupt and an individual less than 18 years cannot join in the formation of company.[11] A person less than 18 years of age may however, participate in the formation of a company if two other persons not disqualified from participating in formation, have subscribed to the memorandum.[12] Also, registration of Companies is not limited to individuals as companies can participate in the registration of another company since companies are referred to as legal persons[13] that can own shares in its name.

You can register your company with any name you want

It is not true that you can register the company with any name you want. It is imperative to note that you cannot register the name of an already existing company. Also, you cannot register a name identical with or similar to an already existing company such that it might be calculated to deceive except where the company is in the course of being dissolved and signifies its consent in such manner as the Corporate Affairs Commission requires.  Also, misleading names, offensive names or names contrary to public policy cannot be registered. Additionally, in situations where consent has not been received, names that would violate any existing trademark will not be registered.[14] [15]

Foreigners cannot fully own a company

A foreigner can participate in the formation of a company,[16] invest and participate in the operation of a company,[17] and a foreigner can solely own a private company.[18] There are however exceptions to this general rule. A foreigner is exempted from participating in matters on the negative list,[19] these matters include production of arms, ammunition, etc., production of and dealing in narcotic drugs and psychotropic substances; production of military and para-military wears and accoutrement, including those of the Police and the Customs, Immigration and Prison Services; and such other items as the Federal Executive Council may, from time to time, determine.[20]

The Nigerian Investment Promotion Commission Act, 1995 permits foreigners to own up to 100% of any business enterprise with the exception of enterprises on the “negative list” of the Act. The negative list includes enterprises involved in the production of and dealing in arms, ammunition, narcotic drugs and psychotropic substances. Apart from ownership restrictions relating to enterprise on the negative list, there are also ownership restrictions with respect to the Nigerian Oil and Gas sector and Architectural practice. The Nigerian Oil & Gas Industry Content Development Act 2010 also referred to as the “Local Content Act”[21] provides that exclusive consideration shall be given to Nigerian indigenous service companies which demonstrate ownership of equipment, Nigerian personnel and capacity to execute contracts on land and swamp operating areas of the Nigerian oil and gas industry.[22]

The Act defines a “Nigerian Company” as “a company formed and registered in Nigeria in accordance with the provisions of Companies and Allied Matters Act with not less than 51% equity shares held by Nigerians”.[23] With respect to Architectural practice, the Architect (Registration, etc.) Act 1969[24] provides that a person shall not prepare or take full responsibility for the erection or commissioning of architectural building plans or practice or carry-on business (other than that having relevance to ship construction, or to landscape or golf-links) under any name, style or title containing the word “architect” unless he is a Nigerian citizen and registered under the Act.[25] Similar restrictions exist with respect to certain professional practice areas.[26]

Registration of a company needs to be renewed every year

Although there are annual requirements that a company must comply with, a company registration does not need to be renewed every year. The Annual requirements include filing of Annual Return, company tax returns, etc.

Every director of the company must have shares

Generally, there is no requirement for a director to hold shares in the company.[27] However, the Articles of Association of the company may prescribe a shareholding qualification for its directors and in such circumstance, this must be complied within two months of the appointment of such director.[28]

It takes time to register a company

Registering a company does not take time. It is possible to register your company within 72 hours. Typically, the process begins with reservation of name, which does not take up to 24 hours. Once the name is successfully reserved, the details for incorporation can be uploaded the same day the name is reserved, and the Commission will approve the incorporation once there are no queries.[29]

COMMENTS

In the course of incorporating a company, it is imperative for entrepreneurs to consult legal experts to advise on the suitability of the company type, structure and regulatory requirements, assist with the drafting of the constitutional documents of the company and all other pre-incorporation documents/agreements.

______________________________________________________________________

For further information on this article and area of law, please contact

Oreoluwa Adebayo at: S. P. A. Ajibade & Co., Lagos

By telephone (+234.1.4729890), fax (+234.1.4605092)

Mobile (+234.809.790.4717, +234.810.318.8416) or

E-mail: oadebayo@spaajibade.com

www.spaajibade.com

______________________________________________________________________

[1]     Section 42, Companies and Allied Matters Act, CAMA 2020 available at <https://www.cac.gov.ng/wp-content/uploads/2020/12/CAMA-NOTE-BOOK-FULL-VERSION.pdf>, accessed on 30/03/2022.

[2]     Section 57, Banks and Other Financial Institutions Act, BOFIA 2020, available at <https://www.cbn.gov.ng/out/2021/ccd/bofia%202020.pdf>, accessed on 30/03/2022.

[3]     PwC, Worldwide Tax summaries “Nigeria Corporate – Other taxes”, available at <https://taxsummaries.pwc.com/nigeria/corporate/other-taxes#:~:text=Stamp%20duties&text=Stamp%20duty%20is%20imposed%20at,eligible%20transaction%20above%20NGN%2010%2C000.>, accessed on 30/03/2022.

[4]     Corporate Affairs Commission, “Schedule of fees”, available at <https://www.cac.gov.ng/schedule-of-fees/>, accessed on 30/03/2022.

[5]     Section 27(2)(a) CAMA 2020.

[6]     Corporate Affairs Commission, “CAC Operations Checklists 2021”, available at <https://www.cac.gov.ng/wp-content/uploads/2021/10/Draft-CAC-Operations-Checklists-2021.pdf>, accessed on 30/03/2022.

[7]     Section 124 CAMA 2020.

[8]     Regulation 13, Corporate Affairs Commission, “Revised Draft Regulation 2020” available at < https://www.cac.gov.ng/wp-content/uploads/2021/01/COMPANIES-REGULATIONS-2021-published.pdf>, accessed on 30/03/2022.

[9]     The QCF blog, “Company shares – paid, unpaid and partly paid”, available at                  <https://www.qualitycompanyformations.co.uk/blog/company-shares-paid-partly-paid-and-unpaid-explained/>,     accessed on 31/03/2022.

[10]    Under s. 281 and 283 of CAMA.

[11]    Section 20, CAMA 2020.

[12]    Section 20(2), CAMA 2020.

[13]    Section 18 (1), CAMA 2020.

[14]    Section 30 CAMA 2020.

[15]    Supra n. 8 at p. 8 – 17.

[16]    Section 20(4), CAMA 2020.

[17]    Section 17 Nigerian Investment Promotion Commission Act, Chapter N117, (Decree N0 16 0f 1995), available at < https://www.nipc.gov.ng/wp-content/uploads/2021/10/NIPC-ACT.pdf>, accessed on 31/03/2022.

[18]    Section 18(2), CAMA 2020.

[19]    Supra n. 16 at s.18

[20]    Supra n.16 at s. 31.

[21]    Nigerian Oil and Gas Industry Content Development Act, 2010 Act No. 2, available at < https://www.ncdmb.gov.ng/images/GUIDELINES/NCACT.pdf>, accessed on 31/03/2022.

[22]    Section 3(2) Nigerian Oil and Gas Industry Content Development Act.

[23]    Section 106 Nigerian Oil and Gas Industry Content Development Act.

[24]    Architect (Registration, etc.) Act 1969, CAP A19 available at <https://epp.lagosstate.gov.ng/regulations/ARCON_Decree_of_1990_Revision_of_2004.pdf>, accessed on 31/03/2022.

[25]    Ibid at s. 1.

[26]    DCSL, “Doing Business in Nigeria – Investor Tool-Kit”, available at <https://www.dcsl.com.ng/data/content/_1442917995_SK80MB7UIB.pdf>, accessed on 31/03/2022.

[27]    Section 277, CAMA 2020.

[28]    Section 277(2), CAMA 2020.

[29]    CAC portal, available at https://www.cac.gov.ng/4341-2/, accessed on 30/03/2022.

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