“Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.”
- Pablo Picasso
Introduction
Prior to the enactment of the Companies and Allied Matters Act 2020[1] (CAMA) in August 2020, the generally available business vehicles under Nigerian regulatory framework[2] were: limited liability companies (LLCs) and unlimited companies (UCs);[3] sole proprietorships (SPs);[4] and partnerships.[5] Only Lagos State, which hosts Nigeria’s premier economic hub, offered Limited Partnership (LP) and Limited Liability Partnership (LLP) options, triggering remarks then, on need for “regulatory competition” in Nigeria’s federal context.[6] CAMA’s provisions on LPs and LLPs have now ‘suspended’ or displaced (except to the extent of any lacuna in CAMA provisions), the Lagos State Partnership Law (LSPL), given the applicability of the former throughout the country.[7] We are not aware if a comparative review of the LSPL relative to CAMA, in order to confirm, whether CAMA being later in time recorded improvements over the LSPL.[8]
Anecdotally, an oft pertinent question that intending investors or entrepreneurs ask, or indeed need to have their lawyers address, is the optimal business vehicle for their proposed venture. This would often entail a comparative analysis of the available vehicle options, vis a vis the circumstances of the proposed venture, including sectoral requirements. For example, by statutory prescriptions, only ‘commercial’ companies (limited by shares or unlimited), can amongst others, undertake banking or insurance business, be a pension industry player, or hold oil and gas assets.[9] For such sectors, intending players do not require any analysis of vehicle options, in considering their entry strategy.[10]
However, such question is relevant for many other sectors, whilst professional services had traditionally been provided, and/or in some cases, mandated to be provided under the partnership model.[11] However, in line with evolving trends, the options have widened, even in some professional services.[12] Typically, the optimality considerations regarding business vehicles would be from: start-up and ongoing regulatory compliance requirements, risk management, flexibility vis a vis the investor’s circumstances cum desired business objectives, and tax efficiency, etc perspectives.
Experience has shown that in making business decisions, options that prima facie appear to be more efficient and therefore potentially preferable, may end up ranking poorly after detailed analysis (including financial modelling as applicable) throw up results. Truly, businesses cannot afford to make decisions that are not ‘well informed’, because they lack empirical basis; consequently, the imperative of such analysis cannot be overemphasised. Sometimes, transformation of an existing business may even be necessitated after such analysis, or when the owners practically experience substantial con(s) of the business vehicle being utilised.
For example, partners in a retail business that was registered as a business name (BN) may see the need for conversion in consonance with the growth of the business; or for example, in order to enjoy the benefits of legal personality and obviate the business suing or being sued in the name of the partners. This is moreso if one or more of the partners have regular employment (say, as top management staff in an unrelated sector company). Other times, business exigencies or other circumstances may require that a private company be re-registered as public or vice versa; LLC to UC or vice versa; or even PLC to UC or vice versa.[13]
Given the new CAMA framework,[14] this article discusses the key features and undertakes a comparative analysis of available business vehicles in Nigeria for investors’ consideration, generally on a sector agnostic basis.
Start-Up Compliance and Maintenance Requirements:
A key consideration is how heavy or light is the regulatory burden? This is exemplified by the respective vehicle’s compliance and maintenance requirements (primarily discoverable in the CAMA and the CAC’s Companies Regulations 2021), with attendant cost and administrative time implications. We will consider the requirements[15] under the relative headings:
- Information and documentation
To register a company, the incorporation documents needs to be completed with relevant information and supporting documentation provided.[16] Similar requirements are prescribed with variations for LLPs, LPs and BNs, with BN requiring the most basic information.[17]
Companies generally appear to require more filings;[18] whilst for year-end reporting, the Form CAC 19 (Annual Return of Companies), is 11 pages, compared with 8, 4 and 4 pages respectively for the LLP, LP and SP counterparts.[19]
- Costs
There is ad valorem stamp duties exposure (at 0.75% of share capital) on the share capital of companies, and graduated CAC filing fees also based on share capital; thus, the higher the capital the greater the statutory fees exposure. Furthermore, PLCs attract higher CAC filing fees at incorporation or increase in share capital than the other LLCs.[20]
CAC charges: N20,000/N5,000 for LLP registration and annual returns; N15,000/N5,000 for LP registration and annual returns; and N10,000/N3,000 for BN registration and annual returns, respectively. Apart from the absence of share capital (and therefore nil stamp duties),[21] in practice the CAC does not require that registration documents of LLPs, LPs and BNs be stamped.[22] Practical issues would arise if (as we think), nominal stamping should be required.[23]
Some fees are flat for LLPs, LPs and BNs: for example it is N10,000 for change of name, whereas companies’ change of name attracts N10,000, N20,000 and N50,000 respectively for SCs, OCs and PLCs. Some transactions like registration of charges attract the same CAC fees irrespective of the business vehicle.[24]
- Investor Numbers: ‘the Fewer the Better or the More the Merrier’?
Section 18(2) CAMA ‘emulates’ SP by permitting single shareholder private companies (SSHCs). Compares to an SP however, the single shareholder (SSH) has better risk exposure due to the separate legal personality of the company, his liability is limited to the number of issued shares, whereas an SP is fully liable for the losses of the business. Thus, compared to an SP, an SSH can be seen as “eating his cake and having it”.
Sole ownership either through SSHCs or SPs can be apposite for businesses that are based on the ideas/solutions/intellectual property of the shareholder or SP, which constitute business asset that can be monetised at greater valuation in the future through sale or assignment. That way the visionary can really enjoy the upside, whilst a single shareholder company helps him with downside protection more than an SP.
While a private LLC may also have more than one shareholder/subscriber, all other vehicles must have at least two shareholders/partners: section 18(1) and 753(1)(a).[25] Pooling of resources (financial, skills and experience) that this affords may be the critical element for the prospective success of the business, and thus sufficient grounds not to utilise SP or SSHC. Clearly, the scale of investment required to prosecute ventures by PLCs informs their large number of shareholders, more particularly, of listed PLCs.
Ultimately, the particular circumstances and allied matters of the proposed or ongoing venture cum promoters/partners/investors could determine optimal number limits or sizes. Section 19(1) CAMA already stipulates that generally partnership sizes shall be limited to 20 partners, whilst section 19(2)(b) exempts law and accounting firms from such restriction.[26] The restriction on number of partners can be an impediment to merger of two or more firms to create an otherwise desire bigger firm; whereas such impediment does not apply to corporate vehicles.
-Timeframe
Timeframe for registering business vehicles is no longer a huge differentiator given the CAC’s online presence and operations. The most critical issue is to ensure accurate completion of forms before uploading them with other requisite documents to obviate any queries which could delay completion of the process, irrespective of vehicle. Although the CAC advertises timelines for concluding registration of businesses, this does not always turn out to be the case in practice.
- Risk Management
- Legal Personality
Historically, the separate legal personality conferred by statute on companies[27] was a major attraction for investors and the evolution of partnership models via the LP and LLP variants was to ‘combine’ this feature with the flexibility of partnership.[28]
If an SP dies (whether intestate or not), the devolution of his business will attract estate taxes at 10% of the value of the assets, upon the grant of probate or letters of administration.[29] However, since the assets of a SSH belongs to the company and not to him,[30] this issue may not have as much stark impact as in an SP scenario; for example, he could have transferred shares for nil consideration to intended beneficiaries, prior to his passing.[31] Transfer of a partner’s interest unfortunately does not, ipso facto, generally lead to disassociation with the partnership.[32] There could more wiggle room for tax planning in the corporate context, albeit this may be moderated by other points made elsewhere in this article. Suffice to say that detailed analysis of tax impact - which this article is constrained from undertaking for reasons of space - is also important, as part of the business vehicle option considerations.
- Agency and Liability
Unless involved in management, shareholders are not generally not agents of the company.[33] In the same way, section 806 precludes limited partners from partaking in management of partnership business, whilst stating their incapacity to bind the firm; with the caveat that participation in management exposes them to liability for firm debts and obligations as if they were general partners. In an LLP context, designated partners are responsible for ensuring the LLP’s compliance with CAMA provisions and liable to fines for any contravention by the LLP.[34]
- Contract Execution/Litigation
For some it is an irritant that they (individuals) would be the parties suing and being sued on behalf of the business, or that their business contracts have to be signed as “ABC [name], trading as (t/a) ABC Ventures”. These drawbacks are not applicable to corporate vehicles and the LLP.[35]
- Corporate Governance
In its Introduction,[36] the Nigerian Code of Corporate Governance 2018 (NCCG) stated that it “seeks to institutionalise corporate governance best practices in Nigerian companies.” Whilst this excludes partnerships (and the NCCG is actually not mandatory for all companies),[37] nothing stops partnerships from being guided by its provisions, with necessary modifications, for ‘internal democracy’ that would enhance sustainable operations. In our view, partnerships may have greater flexibility to set their own bespoke corporate governance rules, especially as the CAC does not in practice regulate provisions of partnership agreements (PAs).[38]
Management of partnerships may be more nimble because designated partners for LLPs and general partners for LPs may be able to take prompt action, unburdened by formalities and strictures of board of directors’ statutory requirements in the CAMA and by sectoral regulators. From relationship management perspectives, individuals who want to loom large over the business are better off being SSHs of SSHCs or being SPs, as overbearing attitudes may create friction between partners (especially simple partnership that is neither LLP nor LP). In any event, a robust PA/ shareholders’ agreement (SHA) as the case will not only provide clarity on rights, obligations and relationship inter partes, but may be could be helpful in averting or managing internal stakeholders’ relationship crisis in the business.
However, shareholders may also seek to achieve bespoke outcomes through their SHA; whilst they are also at liberty to prescribe regulations for the company through the Articles of Association.[39] It is probably accurate to state that the CAC regulates companies more rigorously than partnerships because those are closer to the informal sector than not, and therefore presumptively deserving of lighter regulation, otherwise businesses will not have any incentive to emerge from the shadows of the informal sector.[40]
Compensation/Profit Sharing
Shareholders with equity interest can only expect returns via dividends (interim or final, declaration of which is subject to CAMA rules),[41] and unless they are also executive management, or vendors to the company, cannot expect any other compensation from the company, except directors’ fees and/or sitting allowances. CAMA contains stringent provisions on related party loans, especially to directors and officers, including strict disclosure requirements. Also, property transactions with directors absent disclosure to and shareholders’ ratification resolution is forbidden, and is voidable at the company’s instance.[42]
Many of these restrictions do not apply to the partnership model, where the general partners’ management fees for example in PE context are a key part of the LP Agreement (LPA).[43] In professional firms, partners can take drawings against their share of anticipated profits, but such is not allowed in corporates. The typical PE compensation structure can only be feasible in LP (and more rarely LLP) settings.
- Tax Efficiency/Compliance
Tax efficiency is always a critical consideration in transaction structuring, as much as in entry/country/operating strategy for businesses. In Nigeria’s tax regulatory context, the key factors that tend to weigh in favour partnerships are the tax transparency that taxes partnership profits in the hands of the partners, not at the partnership level. This is unlike corporate tax where taxation happens at two levels: the company and the shareholder via 10% witholding tax (WHT) on dividends.[44]
Even though dividends represents franked investment income on which there is no further tax apart from the WHT already suffered,[45] avoidance of the double layer of taxation can sometimes spell the difference between ‘reasonable’ and ‘under par’ returns. This appears to be one of the reasons why the partnership model is very popular in the private equity (PE) fund structuring landscape.
A second reason that partnerships are more tax efficient is their more optimal/ generally lower WHT exposure on their invoices at 5%, instead of the 10% generally applicable to companies.[46] This confers cash flow advantage on partnerships as the 5% differential would be part of cash available for the purposes of their business which is lost to a corporate competitor that has suffered WHT deduction at 10%. This advantage can get more magnified if both parties are involved in low margin business – because “cash is king”, the deferred tax obligation by way of lower WHT is a strategic business advantage.
On the other hand, a corporate vehicle may be attractive compared to SP or partnerships because the CITA grants small and medium sized companies (companies with less than and above N25 million turnover respectively) tax exemptions – nil (0%) tax and lower (20%) tax rate instead of the generally applicable 30% CIT rate.[47] These preferential tax treatment could mitigate the double layer of taxation described above, and also make a huge difference during the start-up phase of businesses.[48]
- Confidentiality
Confidentiality is also a big concern for many investors, given that filings to the CAC constitute public record. Consequently companies shield details of their internal workings through SHAs (which is not required to be filed), unlike the Memorandum and Articles of Association (MeMart). Previously, partnership agreements did not need to be submitted alongside the application for registration of BNs under CAMA 2004. Presently, although CAMA does not expressly provide for it, it may be argued that the CAC’s Draft Operations Checklist 2021 requires that the exact PA proposed to be used by the partners be filed.[49]
This will not bode well for confidentiality and could present business risk through exposure of commercially sensitive information.[50] Hence, the reasonable view we would expect the CAC to take is a basic PA consistent with the details in the LLP 01 and LP 01 will suffice.[51] Such approach worked previously, and we do not think there is any compelling need to disturb that now.
- Brand Perception
Some investors want to start out with SP and then change to LLC after gaining some scale based on the perception that the compliance requirements of SP is lighter. Some other people rightly or wrongly believe that using BN/SP vehicle will handicap their brand, as “small timers” and therefore would only consider the corporate vehicle options. This is pursuant to the perception that BN/SP is closer to the informal sector than the formal sector where particular investors/business founders want to play because of their long term future plans; for example, to do an initial public offer (IPO). It is thus not unusual for choice of business vehicle to be more largely informed by sentimental reasons than other considerations.
Some vehicles have gained international recognition for particular businesses. For example, even if some corporate vehicles are involved in a PE fund, the underlying architecture of the fund itself is an LP with an LPA.[52] Utilisation of recognised vehicle makes it easier for the promoters/founders to attract investment and other relationships necessary for their success.
- Real Estate Asset Holding Purposes
One popular reason for using the corporate vehicles is as a platform for real estate transactions, especially to sidestep the requirement for governor’s consent to such transactions under section 22 Land Use Act[53] (LUA). Given the legal personality and perpetual succession of companies - changes in company ownership does not affect the company’s title to real estate; the LUA provisions therefore does not catch the indirect transfers through acquisition of property holding companies. That way, transactions costs and time that would have been otherwise expended on governor’s consent application process would be saved, leading to efficiency. In this wise, only LLPs with the beneficial provisions on separate legal personality and perpetual succession is in a similar standing with corporate vehicles – SPs, BNs and LPs are disadvantaged.[54]
However, one would have to consider the start-up compliance and ongoing maintenance costs of the companies over time, especially annual professional fees (such as audit and legal fees) for preparation of audited financial statements, tax and CAC filings, etc to be sure that having a company hold the real property is more cost effective.[55] This may not be an issue where the property value is substantial, and such property could potentially be subject to several transactions – repeatedly avoiding governor’s consent transaction costs could be the clincher. For example, the developer of an apartment block comprising several units could achieve competitive pricing by transferring shares – equivalent to the size of each unit – to prospective purchasers of such units.
Sometimes even for non-real assets, it may be convenient to hold them in a corporate vehicle for orderly management, ease of transmission and other reasons.
- Termination Considerations
Given CAMA provisions, it is more tasking and quite technical to wind up or dissolve companies than partnerships.[56] As between LLPs and LPs, the former is easier, whilst the SP is the one more easily unravelled, given the absence of any other party directly having a stake in the business.[57] From a cost perspective, all things being equal the process is more expensive for companies.
Conclusion
The choice and use of vehicle for business should not be a knee jerk reaction. Sustainable long term future, profitability, market competitiveness and other critical desired objectives may depend on it. Therefore time and resources invested in a comparative analysis of the options given the investor(s) objectives and circumstances to arrive at the most business and regulatory efficient option would be more than worthwhile. Such exercise is akin to due diligence without which a prudent prospective investor will not acquire a major asset or business.
In this regard, it is a happy development that the LP and LLP option are now available as alternative business platforms across Nigeria, not just in Lagos State as in the pre-CAMA days. The CAC also needs to ensure robustness of its service delivery in tandem with the intendment and provisions of CAMA; for example system glitches of its online platform should be minimised.[58] We expect that Nigeria will continue to make the necessary legislative amendments to consolidate its reform efforts towards improving her ease of doing business and truly becoming an enabling environment for businesses, both local and foreign to thrive to the symbiotic benefit all parties and stakeholders through the resulting national economic development and boom.
