Comparative Analysis of Business Ownership in Nigeria

Comparative Analysis of Business Ownership in Nigeria

Business in this context is “any activity or enterprise entered into for profit. It does not mean it is a company, a corporation, partnership, or have any such formal organization, but it can range from a street peddler to General Motors.”  Having a business name does not separate the business entity from the owner, which means that the owner of the business is responsible and liable for debts incurred by the business. If the business acquires debts, the creditors can go after the owner’s personal possessions. A business structure does not allow for corporate tax rates. The proprietor is personally taxed on all income from the business.

The term is also often used colloquially (but not by lawyers or by public officials) to refer to a company. A company, on the other hand, is a separate legal entity and provides for limited liability, as well as corporate tax rates. A company structure is more complicated and expensive to set up, but offers more protection and benefits for the owner.

One of the first decisions that you will have to make as a business owner is how the business should be structured.  All businesses must adopt some legal configuration that defines the rights and liabilities of participants in the business’s ownership, control, personal liability, life span, and financial structure.  This decision will have long-term implications, so you may want to consult with an accountant and attorney to help you select the form of ownership that is right for you. In making a choice, you will want to take into account the following:

1. Your vision regarding the size and nature of your business.
2. The level of control you wish to have.
3. The level of “structure” you are willing to deal with.
4. The business’s vulnerability to lawsuits.
5. Tax implications of the different organizational structures.
6. Expected profit (or loss) of the business.
7. Whether or not you need to re-invest earnings into the business.
8. Your need for access to cash out of the business for yourself.

LEGAL REQUIREMENTS FOR ESTABLISHING OWNERSHIP IN NIGERIA

1. Select and Register Legally Permitted Name for Business: When you select the business name, you have to make sure that it may not resemble or similar to anyone of the already existing brand. This can create outrage against you by that company, as well as by the people who buy their products. So, you have to do it very consciously and avoid this blunder at the very initial stage of your business. After you select the name, and before you print out the cards with this name of your business, you have to register this name immediately.

This is important for the security of the name you chose, as well as for your business because it will be now your right and no one else could use it without your consent.

2. Form an LLC for Your Business: If you want to protect your business, the properties, the college funds of your children, and any kind of liability, you have to get the LLC or corporation for it. As every business has its formalities, so LLC is beneficial for each one according to the situation of that business. Mostly it is said that LLC is best for small business owners as it protects them against any frauds or problems that big business owners could create for them.

There are other types of corporations that a business owner can get. These include the S Corporation and C Corporation. People use them according to the type of business they have.

Comparative Analysis of Business Ownership in Nigeria

3. Get Federal Tax ID Number: For running your business legally, and making it credible, you need a proper federal tax ID number for it. It is also sometimes known as an employee identification number (EIN). This number is given by the government authorities to the company. It serves as a social security number for the company and can be used to track the transactions of the company.

Therefore, you must have it to have a legal presence in a country, and also to protect your business.

4. Get License at Initial Stage: You have to get permits and licenses for your company at a very initial stage. As soon as you establish your business, you have to apply for it so that only you can claim to have that business, and also give evidence if asked about the legal authority of running that business.

BUSINESS FUNCTIONS

Eight (8) business functions

1. General Management.
2. Public relations.
3. Human Resources.
4. Financial

MAJOR DISTINCTION AMONG EACH OF THE BUSINESS FUNCTIONS

Management Functions

On any given day, business owners and managers will engage in a mix of many different kinds of activities—for example, deal with crises as they arise, read, think, write, talk to people, arrange for things to be done, have meetings, send e-mails, conduct performance evaluations, and plan. Although the amount of time that is spent on each activity will vary, all the activities can be assigned to one or more of the five management functions: planning, organizing, staffing, directing, and controlling.

1. Management principles are important to all small businesses.
2. Management decisions will impact the success of a business, the health of its work environment, its growth if growth is an objective, and customer value and satisfaction.
3. Management is about achieving organizational objectives through people.
4. The most common reason attributed to small business failure is failure on the part of management.
5. On any given day, a typical small business owner or manager will be engaged in some mix of planning, organizing, staffing, directing, and controlling.
6. Different situations call for different leadership styles. The three major styles are autocratic, democratic, and laissez-faire. Bad leaders typically stick with one style.
7. The management hierarchy is typically composed of three levels: top or executive, middle, and first-line or supervisory. If a small business is large enough to have these three levels, it is important that there be a clear distinction between them.
8. Management skills are required for success. Technical, conceptual, interpersonal, and decision-making skills will be of differing importance depending on the management level.

Comparative Analysis of Business Ownership in Nigeria

FINANCIAL STRUCTURE

Financial structure is the mix of short-term liabilities, short-term debt, long-term debt, and equity that a business uses to finance its assets. A significant reliance on debt funding allows shareholders to achieve a higher return on investment, since there is less equity in the business. However, this financial structure can be risky, since the firm has a large debt obligation that must be paid. A firm positioned as an oligopoly or monopoly is best able to support such a leveraged financial structure, since its sales, profits and cash flows can be reliably predicted. Conversely, a business positioned in a highly competitive market cannot support a high degree of leverage, since it experiences volatile earnings and cash flows that could cause it to miss debt payments and trigger a bankruptcy filing. A business in this latter position needs to skew its financial structure in the direction of more equity, for which there is no payback requirement.

1. Financial structure refers to the mix of debt and equity that a company uses to finance its operations. It can also be known as capital structure.
2. Private and public companies use the same framework for developing their financial structure but there are several differences between the two.
3. Financial managers use the weighted average cost of capital as the basis for managing the mix of debt and equity.
4. Debt to capital and debt to equity are two key ratios that are used to gain insight into a company’s capital structure.
5. shows how financial and capital structures appear on a firm’s Balance sheet.

OWNERSHIP STRUCTURE

Ownership structure concerns the internal organization of a business entity and the rights and duties of the individuals holding a legal or equitable interest in that business.

An overview of the four basic legal structures of Business: Sole Proprietorship; Partnerships; Corporations and Limited Liability Company follows.

Sole Proprietorship

The vast majority of small businesses start out as sole proprietorships.  These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business.  Sole proprietorships own all the assets of the business and the profits generated by it.  They also assume complete responsibility for any of its liabilities or debts.  In the eyes of the law and the public, you are one in the same with the business.

Advantages of a Sole Proprietorship

• Easiest and least expensive form of ownership to organize.
• Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.

Disadvantages of a Sole Proprietorship

• Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk.
• May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.

Partnerships

In a Partnership, two or more people share ownership of a single business.  Like proprietorships, the law does not distinguish between the business and its owners.  The Partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed; Yes, its hard to think about a “break-up” when the business is just getting started, but many partnerships split up at crisis times and unless there is a defined process, there will be even greater problems.  They also must decide up front how much time and capital each will contribute, etc.

Advantages of a partnership include that:

1. two heads (or more) are better than one
2. your business is easy to establish and start-up costs are low
3. more capital is available for the business
4. you’ll have greater borrowing capacity
5. high-calibre employees can be made partners
6. there is opportunity for income splitting, an advantage of particular importance due to resultant tax savings
7. partners’ business affairs are private
8. there is limited external regulation
9. it’s easy to change your legal structure later if circumstances change.

Comparative Analysis of Business Ownership in Nigeria

Disadvantages of a partnership include that:

1. the liability of the partners for the debts of the business is unlimited
2. each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts
3. there is a risk of disagreements and friction among partners and management
4. each partner is an agent of the partnership and is liable for actions by other partners
5. if partners join or leave, you will probably have to value all the partnership assets and this can be costly

Types of Partnerships that should be considered:

1. General Partnership

Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agreement.  Equal shares are assumed unless there is a written agreement that states differently.

2. Limited Partnership and Partnership with limited liability

“Limited” means that most of the partners have limited liability (to the extent of their investment) as well as limited input regarding management decision, which generally encourages investors for short term projects, or for investing in capital assets.  This form of ownership is not often used for operating retail or service businesses.  Forming a limited partnership is more complex and formal than that of a general partnership.

 

3. Joint Venture

Acts like a general partnership, but is clearly for a limited period of time or a single project.  If the partners in a joint venture repeat the activity, they will be recognized as an ongoing partnership and will have to file as such, and distribute accumulated partnership assets upon dissolution of the entity.

Corporations

A Corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it.  A Corporation can be taxed; it can be sued; it can enter into contractual agreements.  The owners of a corporation are its shareholders.  The shareholders elect a board of directors to oversee the major policies and decisions.  The corporation has a life of its own and does not dissolve when ownership changes.

Advantages of a Corporation

1. Shareholders have limited liability for the corporation’s debts or judgments against the corporation.
2. Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.
3. Corporations can raise additional funds through the sale of stock.

Comparative Analysis of Business Ownership in Nigeria

Disadvantages of a Corporation

1. The process of incorporation requires more time and money than other forms of organization.
2. Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.

Subchapter S Corporation

A tax election only; this election enables the shareholder to treat the earnings and profits as distributions, and have them pass through directly to their personal tax return.  The catch here is that the shareholder, if working for the company, and if there is a profit, must pay his/herself wages, and it must meet standards of “reasonable compensation”.  This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit.  If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.

Limited Liability Company (LLC)

The LLC is a relatively new type of hybrid business structure that is now permissible in most states.  It is designed to provide limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.  Formation is more complex and formal than that of a general partnership.

The owners are members, and the duration of the LLC is usually determined when the organization papers are filed.  The time limit can be continued if desired by a vote of the members at the time of expiration.  LLC’s must not have more than two of the four characteristics that define corporations:  Limited liability to the extent of assets; continuity of life; centralization of management; and free transferability of ownership interests.

Comparative Analysis of Business Ownership in Nigeria

Federal Tax Forms for LLC

Taxed as a partnership in most cases; corporation forms must be used if there are more than 2 of the 4 corporate characteristics, as described above.

In summary, deciding the form of ownership that best suits your business venture should be given careful consideration.  Use your key advisors to assist you in the process.

Comparative Analysis of Business Ownership in Nigeria

RELATIVE STRUCTURE

Cost structure refers to the types and relative proportions of fixed and variable costs that a business incurs. The concept can be defined in smaller units, such as by product, service, product line, customer, division, or geographic region. Cost structure is used as a tool to determine prices, if you are using a cost-based pricing strategy, as well as to highlight areas in which costs might potentially be reduced or at least subjected to better control. Thus, the cost structure concept is a management accounting concept; it has no applicability to financial accounting.

To define a cost structure, you need to define every cost incurred in relation to a cost object. The following bullet points highlight key elements of the cost structures of various cost objects:

1. Product cost structure
   1. Fixed costs. Direct labor, manufacturing overhead
   2. Variable costs. Direct materials, commissions, production supplies, piece rate wages
2. Service cost structure
   1. Fixed costs. Administrative overhead
   2. Variable costs. Staff wages, bonuses, payroll taxes, travel and entertainment
3. Product line cost structure
   1. Fixed costs. Administrative overhead, manufacturing overhead, direct labor
   2. Variable costs. Direct materials, commissions, production supplies
4. Customer cost structure
   1. Fixed costs. Administrative overhead for customer service, warranty claims
   2. Variable costs. Costs of products and services sold to the customer, product returns, credits taken, early payment discounts taken

Some of the preceding costs can be difficult to define, so you may need to implement an activity-based costing project to more closely assign costs to the cost structure of the cost object in question.

You can alter the competitive posture of a business by altering its cost structure, not only in total, but between its fixed and variable cost components. For example, you could outsource the functions of a department to a supplier who is willing to bill the company based on usage levels. By doing so, you are eliminating a fixed cost in favor of a variable cost, which means that the company now has a lower breakeven point, so that it can still earn a profit at lower sales levels.

Knowledge of the capacity levels associated with the existing fixed cost structure can also allow a business to increase its profits by lowering prices sufficiently to maximize the utilization of a fixed cost item. For example, if a company has spent $100,000 on a high-capacity automated machine and it is currently only being utilized 10% of the time, a reasonable action would be to obtain more work to increase the amount of cash earned from that machine, even at prices that might normally be considered low. This type of pricing behavior is only possible if you have a detailed knowledge of the cost structure of a business.

LIQUIDATION

Liquidation (or winding-up) is a process under Company Law that results in the company ceasing to exist. A company can decide to go into voluntary liquidation in which case the company arranges voluntarily to enter liquidation. Where a third party (an unpaid creditor) wishes to pursue liquidation of an insolvent company, as its debt is not being addressed, application must be made to the High Court for a decision on whether a liquidator should be appointed to the company. The liquidator’s job is to realise the assets of the company and to pay the creditors (including Revenue) from the proceeds of any assets in the company. Where there are insufficient funds to pay all the creditors, the funds available are distributed to creditors in a particular order of preference.