Most people gravitate towards registering a business name (and not incorporating a company) when they start off solely because it’s cheaper. Now don’t get it wrong, it’s not like there is anything bad in registering a business name, not at all, but the thing is, a registered business name is more suited to some businesses than others.
For instance, let’s look at the hypothetical case of Kelvin; Kelvin is in the haulage and transportation business. He moves goods and people from Lagos to any part of the country. Kelvin’s business model means that he borrows money to maintain his trucks and pay dues (whether from banks or from his investors/friends).
This business model has high risk, and therefore the better structure to have would be an incorporated company because in an incorporated company the risk would normally be borne by the company and not personally by Kelvin. In Law, it is called the principle of corporate separate personality. This is because, once a company is incorporated, it acquires a legal personality that is distinct from that of the members of the company. See Section 37 of the Companies and Allied Matters Act, 2004; Union Bank (Nigeria) Ltd v. Penny-Mart Ltd (1992) 5 NWLR (pt. 240) 228 at 237.
However, if Kelvin decided to register a business name when he originally set up his business, and there was a vital accident that destroyed his trucks beyond repairs and also killed people (and Kelvin didn’t insure his trucks and the lives of the drivers), he would be personally liable to pay for the loans he obtained from the bank. This is because, unlike an incorporated company that has a personality distinct from that of its members, a sole proprietorship kind of business with its registered name does not have a life of its own different from that of the owner. Personal liability would mean his creditor(s) could get a court order for the repayment of the debts through the sale of his personal assets (his house, his car etc.).
Now if Kelvin had incorporated a company, and the company obtained the loans, it is the company that would be on the hook if such incidents occurred, and the creditors would not be able to come after Kelvin’s personal assets, but only the assets of the business. This is termed “Limited liability in law”.
Here are some differences between a limited liability company and a registered business name:
1. In a limited liability company, shareholders have limited liability and are not personally liable for the debt incurred by the company, while the owner of a registered business name has unlimited liability.
2. A limited liability company is more expensive to set up as you will need the services of a lawyer to register the business and also draft an organisational constitution. A registered business name does not necessarily need the help of a lawyer and the fund needed is relatively low.
3. In a limited liability company, there are laid down structures that must be adhered to while in the registered business name company, there are no such things as annual general meeting or board resolutions.
4. Ownership is transferable easily in the limited liability company and there is lesser risk of the company folding up at the demise of any stakeholder. But a business with just a registered business name might fold up immediately after the founder’s death because there is usually no difference between the business owner and the business.
In conclusion, whether you are a startup or an already established business, it’s very necessary for you o incorporate your business as early as you can.