DISADVANTAGES OF INCORPORATING A COMPANY IN NIGERIA

Incorporating a company can provide important benefits, including separate legal personality, limited liability and continuity of the business.

However, incorporation also comes with additional responsibilities.

Once a business becomes a company, the owners and directors must comply with various legal, administrative and financial requirements. These obligations can mean additional costs and paperwork compared with operating a simpler business structure.

Before deciding to incorporate, it is therefore important to understand both the benefits and the potential disadvantages.

1. HIGHER COSTS OF RUNNING THE BUSINESS

One of the first things a business owner may notice after incorporation is that maintaining a company can involve more expenses.

There are the initial costs associated with registration, but the financial obligations do not necessarily end after incorporation.

Depending on the company’s activities and circumstances, business owners may need to budget for:

• Corporate regulatory filings;
• Annual returns;
• Accounting and bookkeeping services;
• Legal and professional services;
• Tax compliance; and
• Other applicable regulatory requirements.

The actual cost will vary depending on the company’s size, activities and compliance obligations.

For a very small business, these additional costs may be an important factor to consider when choosing a business structure.

2. GREATER LEGAL AND REGULATORY COMPLIANCE

An incorporated company is subject to the requirements of the Companies and Allied Matters Act 2020 (CAMA 2020) and other applicable laws and regulations.

Companies are expected to meet their statutory obligations, which may include filing annual returns, maintaining required records and notifying the Corporate Affairs Commission (CAC) of certain changes.

Depending on the nature of the business, there may also be tax, sector-specific and other regulatory requirements.

Failure to comply with applicable requirements can result in penalties and other legal consequences.

This means that incorporation comes with an ongoing compliance responsibility—not simply a one-time registration exercise.

3. MORE ADMINISTRATION AND RECORD-KEEPING

A company generally requires more formal administration than an informal business operation.

Corporate records need to be properly maintained, and important decisions may need to be documented through appropriate corporate procedures.

Depending on the company’s structure and activities, this can involve maintaining records relating to:

• Directors;
• Shareholders and shareholding;
• Company resolutions;
• Meetings;
• Company finances;
• Changes to the company’s particulars; and
• Other statutory information.

For a business owner accustomed to making every decision informally, these additional procedures may initially feel burdensome.

However, proper record-keeping also helps demonstrate that the company is being operated as a separate legal entity.

4. LESS PRIVACY FOR CERTAIN BUSINESS INFORMATION

Incorporation also means that certain information about a company is maintained through the corporate registration system and may be accessible in accordance with applicable CAC rules and procedures.

Depending on the information involved, this can include details concerning the company’s registered office, directors, shareholders or other corporate particulars.

Business owners who prefer to keep their business affairs entirely private should therefore understand that operating through a company involves a greater degree of corporate transparency.

The specific information available and the manner in which it can be accessed will depend on applicable law and CAC procedures.

5. THE COMPANY IS SEPARATE FROM ITS OWNERS

One of the greatest legal advantages of incorporation can also require an adjustment in how business owners think about their business.

Once incorporated, the company becomes a separate legal person.

Its assets belong to the company, not automatically to its shareholders.

Its money is also company money.

For example, if a company earns ₦10 million, the fact that an individual owns all the company’s shares does not mean that the ₦10 million automatically belongs to that individual personally.

The company and its owner remain legally distinct.

This means business owners must be careful about withdrawing or using company funds for personal purposes and should ensure that transactions between the company and its owners are properly authorised and documented.

6. DIRECTORS AND OFFICERS HAVE LEGAL RESPONSIBILITIES

Incorporation also creates responsibilities for the people managing the company.

Directors have duties under Nigerian company law and are expected to exercise their powers responsibly and in accordance with their legal obligations.

They may have duties relating to matters such as:

• Acting in the interests of the company;
• Exercising appropriate care, skill and diligence;
• Avoiding or properly disclosing conflicts of interest;
• Not making improper personal profits; and
• Properly handling company property and information.

Running a company therefore involves more than simply having control over business decisions.

The people managing the company must understand and comply with their legal responsibilities.

7. CLOSING OR CHANGING THE BUSINESS MAY ALSO INVOLVE FORMAL PROCEDURES

A company does not simply disappear because its owners decide to stop trading.

Depending on the circumstances, there may be formal procedures for restructuring, transferring ownership, winding up or otherwise bringing the company’s affairs to an end.

This is another consequence of the company’s separate legal personality.

The company exists independently of the personal decisions of its shareholders and directors, so changes to its legal status may require appropriate corporate and regulatory steps.

SO, IS INCORPORATION A BAD IDEA?

Not necessarily.

The fact that incorporation comes with additional responsibilities does not mean that it is unsuitable for a business.

Incorporation can provide significant advantages, including separate legal personality, potential limited liability, perpetual succession and a formal structure for ownership and investment.

The important question is whether those benefits justify the additional responsibilities and costs for your particular business.

A small business with limited operations may have different needs from a company preparing to attract investors, enter major contracts or expand significantly.

KNOW BEFORE YOU REGISTER

Incorporation should not be treated as simply adding “Limited” to a business name.

It creates a legal entity with its own rights, obligations and compliance requirements.

Before registering a company, business owners should consider:

• The nature and size of the business;
• The intended ownership structure;
• Compliance obligations;
• Expected operating costs;
• Tax and regulatory requirements; and
• The long-term goals of the business.

Understanding both the advantages and disadvantages of incorporation allows a business owner to choose a structure based on the actual needs of the business.

Before making a decision, consider obtaining professional legal and accounting advice on the structure and obligations applicable to your business.