In Nigeria, one of the most popular options is a Private Company Limited by Shares. This structure offers numerous benefits that can help businesses thrive.
From limited liability to tax advantages, a private limited company can provide a solid foundation for both small startups and larger ventures.
What are the Benefits of a Private Limited Company?
This article explores the key benefits of establishing a Private Company Limited by Shares in Nigeria.
Definition of Private Limited Company
A Private Company Limited by Shares is a company that is a legal entity in its own right, separate from the identity of its owners, and has special status in law. The assets, liabilities, and profits belong to the company, not the owners.
A private limited company is owned by its shareholders, the people who hold shares in the business. A company can be owned by just one individual who has sole control over all decisions made about the business.
Where there are multiple shareholders, each one has voting rights in proportion to the number of shares they hold. If one shareholder has more than 25 percent of the shares, they are treated in company law as ‘persons of significant interest’ because they can influence decisions made about the business.
Characteristics of an LTD
This table reflects the regulatory requirements for Private Limited Companies (LTD) in Nigeria under the Companies and Allied Matters Act (CAMA) 2020.
| Characteristics | Description |
|---|---|
| Shareholders | Minimum number of shareholder(s) – 1 Maximum number of shareholders – 50 |
| Board of Directors | Minimum number of director(s) – 1 |
| Authorized Share Capital | Minimum share capital of ₦100,000 (Private Limited Company) |
| Paid-Up Capital | Paid-up capital required at incorporation (must not be less than 25% of the authorized share capital) |
| Board Meetings | Minimum of 4 board meetings per year (quarterly) |
| Annual General Meetings | Must hold at least one AGM annually within 15 months of the previous AGM |
| Taxation | Subject to Companies Income Tax (CIT) at 30% on profits exceeding ₦100 million; CIT rate is reduced to 20% for companies with profits between ₦25-₦100 million. Companies below ₦25 million are exempt from CIT. |
| Naming Requirements | The company name must be unique, must include "Limited" or "Ltd," and cannot conflict with existing names. It must comply with CAC's guidelines on business names. |
| Forms Required For Registration | Form CAC1.1 (Application for Registration), Form CAC2.5 (Particulars of Directors), Form CAC2.3 (Particulars of Shareholders), and other incorporation forms as required by CAC. |
| Public Disclosure | Basic information on directors, shareholders, and the company’s address must be submitted to the Corporate Affairs Commission (CAC) and is publicly accessible. |
| Transfer of Shares | Shares are not freely transferable; the transfer is restricted and subject to approval by existing shareholders. |
| Financial Reporting | Must file annual financial statements with the CAC, even if the company is inactive. |
| Employment Obligations | Must register for the Pay-As-You-Earn (PAYE) system for income tax and comply with National Pension Commission (PENCOM) regulations if there are employees. |
Benefits of a Private Company Limited by Shares
A Private Company Limited by Shares (Ltd.) is a popular business structure known for its many advantages. Below are some of the key benefits that make this structure appealing for small and growing businesses:
1. Limited Liability
One of the biggest advantages of a Private Company Limited by Shares is limited liability. Shareholders' personal assets are protected, and their liability is limited to the amount they invested in the company.
This means that in case of financial trouble or legal claims against the company, personal wealth remains safe. This protection gives peace of mind to business owners as their personal finances are not at risk.
2. Separate Legal Entity
A private limited company operates as a separate legal entity from its owners. This means the company can own property, incur debts, enter contracts, and even sue or be sued in its name.
This separation offers better asset protection and easier transfer of ownership. It also supports perpetual existence, meaning the company continues to operate even after the death of an owner.
3. Enhanced Credibility and Professionalism
Operating as a private limited company adds a level of professionalism and credibility to your business. The "Limited" suffix in the company name signals to clients, suppliers, and partners that the company is a serious entity, subject to stricter regulations and transparent reporting.
This image boosts customer trust, attracts new clients, and opens up more opportunities such as business contracts and partnerships that may be unavailable to sole proprietorships.
4. Easier Access to Capital
Private limited companies have more avenues for raising capital compared to sole proprietorships or partnerships. They can issue shares to attract investors, providing the necessary funds for expansion.
Moreover, banks and financial institutions are often more inclined to lend to private companies, viewing them as lower-risk borrowers due to their structured governance and limited liability.
5. Flexibility in Ownership
Ownership of a private limited company can be easily transferred through the sale of shares, making it simpler to transfer control in case of death or a decision to sell. The company can also issue different classes of shares with varying rights, offering flexibility in ownership structure.
This feature makes it easy for families or small groups of investors to retain control while ensuring continuity.
6. Restricted Trade of Shares
One unique feature of private companies is the restriction on the trade of shares. This limitation protects the company from hostile takeovers, as shares cannot be easily sold to outsiders without the approval of other shareholders.
Shareholders have control over who enters the ownership circle, maintaining stability in the company’s governance.
7. Continued Existence
A private limited company has perpetual existence, meaning it remains operational even after the original owners pass away. This contrasts with sole proprietorships, where the business ceases to exist upon the death of the owner.
The company structure allows for smooth succession planning, ensuring business continuity.
8. Owning Property
Since a private limited company is a separate legal entity, it can acquire, own, and dispose of property in its name. The company, not the shareholders, is the rightful owner of its assets, protecting the company's resources from claims by individual shareholders.
9. Increased Borrowing Capacity
Private companies have greater borrowing capacity compared to other business structures. They can issue secured and unsecured debentures and accept deposits from the public. This makes it easier for businesses to secure large financial assistance, particularly for expansion projects.
10. Tax Exemption
Small businesses with an annual turnover of less than N25 million are exempted from paying Company Income Tax in Nigeria.
11. Privacy and Control
Private limited companies offer greater privacy compared to public companies. They are not required to publicly disclose as much financial information, which helps maintain confidentiality.
Additionally, the company's decision-making processes are more streamlined since they usually involve a smaller group of shareholders.
12. Regulatory Flexibility
Under CAMA 2020, private companies benefit from reduced regulatory burdens. For example, they can operate with just one director, and smaller companies are not required to appoint a company secretary. This flexibility lowers compliance costs, making it easier to manage the business.
13. Business Continuity
The structured nature of a private company supports smooth business continuity. Ownership can be easily transferred to new investors or family members, making it attractive for acquisition or merger. Its clear governance structure also makes it a more appealing target for future buyers.
14. Scalability
Private limited companies are highly scalable. They can start small and gradually expand without changing their core structure. As the business grows, the company can convert to a public limited company (PLC) or explore public funding options. This scalability makes it a preferred option for startups and SMEs looking to grow.
15. Protecting a Company Name
When you register a private limited company, your company name is legally protected. No other business can register the same or a similar name, unlike sole proprietorships, where business names lack this protection. This exclusivity helps in building a strong brand identity.
Requirements for Registering a Private Limited Company in Nigeria
Here are the requirements for Incorporating a Private Company Limited by Shares with the CAC:
Benefits of Incorporating in Nigeria
Incorporating a business in Nigeria offers several advantages, both for local entrepreneurs and foreign investors. The regulatory environment, economic opportunities, and strategic positioning in Africa make Nigeria a highly attractive destination for business incorporation.
Access to Nigeria’s Large Market
Nigeria has the largest population in Africa, with over 200 million people. Incorporating in Nigeria provides businesses direct access to this vast consumer base, offering tremendous potential for growth and profitability.
Incentives for Specific Sectors
The Nigerian government offers tax breaks and other incentives for businesses in strategic sectors like agriculture, technology, manufacturing, and export-oriented businesses. These incentives can significantly reduce operational costs.
Ease of Incorporation for Foreign Investors
Foreign investors can easily incorporate businesses in Nigeria with the assistance of local consultants. The Corporate Affairs Commission (CAC) provides clear guidelines and electronic filing systems to streamline the registration process.
Skilled Workforce
Nigeria has a relatively young and skilled workforce, which can be a valuable asset for foreign investors.
Wrapping up...
A Private Company Limited by Shares offers numerous advantages that make it an appealing choice for entrepreneurs and investors alike.
With features such as limited liability protection, separate legal identity, perpetual succession, and favorable tax treatment, this business structure provides a solid foundation for growth while protecting personal assets.
Understanding these benefits is crucial for anyone considering forming a private limited company, as it helps navigate regulatory requirements and leverage the advantages associated with this popular business structure.
Register your Private Company Limited by Shares (LTD) in Nigeria
Here's how SplashDict's team of CAC-accredited consultants can help:
