When starting a business in Nigeria, choosing the right company structure is critical for legal, operational, and financial reasons. Under the Companies and Allied Matters Act (CAMA) 2020, there are different types of companies that individuals and groups can register in Nigeria.
Understanding Types of Companies under the Company and Allied Matters Act (CAMA) 2020
The Corporate Affairs Commission (CAC) provides a comprehensive framework for the registration, management, and dissolution of companies in Nigeria. Here, we delve into the types of companies recognized under CAMA 2020, their unique characteristics, and the legal implications of each.
What is a Company?
A company refers to an individual or group of individuals who conduct commercial business practices to earn a profit. This business structure forms a separate legal entity. This means the company has the same rights as a natural person and can incur debt, sue, and be sued.
Unlike a sole trader or a partnership structure, you’re not liable (in your capacity as a member) for the company’s debts. Your only financial obligation is to pay the company any amount unpaid on your shares if you are called on to do so. However, directors of the company may be held personally liable if found to be in breach of their legal obligations.
Types of Companies
Company types can be classified as either private or public companies, each with specific requirements and restrictions.
Types of Private Companies in Nigeria
A Private Company is a business entity owned by a small group of people, and its shares are not available to the general public. These companies tend to be smaller and closely held businesses. Private companies are governed by CAMA and are the most common type of company registered in Nigeria.
These are the types of Private Companies registrable in Nigeria:
Private Company Limited by Shares (LTD)
A Private Company Limited by Shares (LTD) is a company where the liability of shareholders is limited to the value of the shares they hold. This means that if the company faces financial difficulties or debt, shareholders are only liable for their unpaid shares.
Key Features:
- Minimum of 1 shareholder and maximum of 50 shareholders.
- At least one director is required (the same person can be the sole shareholder and director).
- Shares are not publicly traded.
- Annual General Meetings (AGM) are optional for small companies.
- Limited liability for shareholders, meaning personal assets are protected in the case of debts.
- Corporate tax applies to profits.
Requirements for Registration:
- A minimum of ₦100,000 share capital for small companies.
- Articles of Association and Memorandum of Association.
- At least one director and one shareholder (which could be the same person).
- Registered office address within Nigeria.
- Filing of forms with the Corporate Affairs Commission (CAC).
Private Unlimited Company
A Private Unlimited Company is unique because there is no limit to the liability of the members. In the event of liquidation or financial crisis, shareholders are liable for all the debts and obligations of the company, extending beyond their share capital to their personal assets.
Key Features:
- No limit to shareholders' liability.
- Typically used for highly specialized businesses.
- Rarely chosen due to its high-risk nature.
Requirements for Registration:
- Same as Private Limited by Shares, except there is no limit to shareholder liability.
Private Company Limited by Guarantee
This type of company is commonly used by non-profits, charities, and foundations. Instead of shareholders, this structure has members who guarantee to contribute a nominal amount if the company is wound up.
Key Features:
- No share capital; members give a guarantee instead.
- Non-profit organizations, religious institutions, and charities commonly use this structure.
- The profits cannot be distributed to members but must be reinvested into the organization’s activities.
- Members’ liability is limited to the guarantee amount (usually small).
Requirements for Registration:
- Approval from the Attorney General of the Federation.
- Minimum of two members.
- Articles of Association and Memorandum of Association, focusing on non-profit objectives.
- Registered office address in Nigeria.
Types of Public Companies in Nigeria
A Public Company is one where shares can be offered to the public and traded on the stock exchange. Public companies are often larger corporations that aim to raise capital by offering shares to the public.
These are the types of Private Companies registrable in Nigeria:
Public Company Limited by Shares (PLC)
In this type of company, the liability of shareholders is limited to the value of the shares they hold. Public companies are listed on the stock exchange, allowing the public to buy and sell shares.
Key Features:
- Unlimited number of shareholders.
- At least two directors are required.
- The company must issue a minimum of 25% of its authorized share capital to the public.
- Annual General Meetings (AGM) are mandatory.
- Detailed financial reporting and regulatory compliance, including the submission of financial statements to the Corporate Affairs Commission (CAC).
- Shares can be freely bought and sold by the public on the stock exchange.
Requirements for Registration:
- Minimum of ₦2 million share capital.
- Memorandum and Articles of Association.
- At least two directors and two shareholders.
- A corporate secretary must be appointed.
- Filing of forms with the CAC.
- Regular compliance with the Securities and Exchange Commission (SEC) and Nigerian Stock Exchange (NSE) regulations.
Public Unlimited Company
In a Public Unlimited Company, there is no limit to the liability of shareholders. This means shareholders are fully liable for the debts and obligations of the company.
Key Features:
- No limit to shareholders' liability.
- Shares can be traded publicly, but with high financial risk.
- Suitable for specific sectors where high-risk activities are involved.
Requirements for Registration:
- Same as Public Limited by Shares, but unlimited liability for shareholders.
Public Company Limited by Guarantee
Though rare, a Public Company Limited by Guarantee could exist where a non-profit organization chooses to go public. However, profits from this company cannot be distributed to its members.
Key Features:
- The members' liability is limited to the amount they guarantee to pay in the event of liquidation.
- Primarily used for charitable or non-profit purposes.
- Profits must be used for the company’s objectives, not distributed to members.
Requirements for Registration:
- Same as a Private Company Limited by Guarantee but with public reporting requirements.
Comparison of Private and Public Companies
| Features | Private Company | Public Company |
|---|---|---|
| Number of Shareholders | 1-50 | Unlimited |
| Directors Required | Minimum 1 | Minimum 2 |
| Liability | Limited or Unlimited | Limited or Unlimited |
| Share Trading | Shares cannot be offered to the public | Shares can be publicly traded |
| AGM | Optional for small companies | Mandatory |
| Minimum Share Capital | ₦100,000 (small companies) | ₦2 million |
| Financial Reporting | Limited regulatory requirements | Detailed and mandatory financial reporting |
| Listing on Stock Exchange | Not allowed | Allowed |
Choosing the Right Company Type
The decision to choose between a private or public company, or whether to limit liability by shares, guarantee, or opt for an unlimited company, depends on several factors, including:
1. Nature of Business
Due to their complexity and regulatory requirements, certain industries, like banking, insurance, aviation, and telecommunications, are mandated to operate as public companies. For instance, large banks cannot register as private companies.
2. Liability
- Limited Liability: A Private Limited Liability Company (Ltd) and Public Company (Plc) offer limited liability, meaning your assets are generally protected if the business incurs debts.
- Unlimited Liability: Unlimited companies do not offer liability protection; shareholders are personally liable for company debts.
- Company Limited by Guarantee (Ltd/Gte): Members’ liability is limited to the amount they contribute in case of liquidation, making this structure ideal for non-profits.
3. Share Capital
- Private Ltd and Public Plc: Both can raise funds through the sale of shares. Public companies (Plc) can also raise capital from the public via stock exchanges, making them more suitable for large businesses.
- Ltd/Gte: Relies on contributions and grants, making it less suitable for businesses needing significant funding.
4. Number of Members
- Private Ltd: Limited to a maximum of 50 members, ideal for smaller, controlled ownership.
- Public Plc and Ltd/Gte: No upper limit on members, suitable for larger companies needing more people involved.
5. Accountability
- Public Plc: Requires high transparency and strict reporting, suitable for those comfortable with regulatory scrutiny.
- Private Ltd and Ltd/Gte: Offer more privacy with fewer regulatory requirements.
6. Purpose
- Profit-Driven: Private Ltd and Public Plc are best suited for businesses focused on making profits.
- Non-Profit: Ltd/Gte is ideal for charitable organizations or social enterprises, as it is designed for non-profit activities.
7. Management
- Private Ltd: Allows for sole management, as only one director is required.
- Other Types: Public Plc and Ltd/Gte require at least two directors.
8. Funding
- Private Ltd and Public Plc: Can raise funds through shares, loans, or capital markets.
- Ltd/Gte: Limited to member contributions, grants, or donations, restricting fundraising capacity.
9. Taxation
- Private Ltd and Public Plc: These companies are taxable as they are profit-making entities.
- Ltd/Gte: Non-profit companies are tax-exempt as they are not designed to generate profits.
10. Regulatory Requirements
- Public Plc: Has the highest regulatory compliance demands, including strict governance and reporting standards.
- Private Ltd and Ltd/Gte: Face fewer regulatory requirements, making them easier to manage.
11. Growth Potential
- Public Plc: Offers greater potential for growth due to broader funding opportunities and member inclusion.
- Private Ltd: Provides growth but with limitations in terms of funding options.
- Ltd/Gte: Not growth-oriented, focusing on sustaining charitable or social activities.
The best company structure depends on your business’s goals, industry, and future plans. Public companies offer growth and accountability, while private companies provide more control and privacy. Non-profit organizations should opt for a company limited by guarantee.
Conclusion
Understanding the different types of companies under CAMA 2020 is crucial for business owners, legal practitioners, and stakeholders in Nigeria. Each company type offers unique benefits and imposes specific obligations on its members.
Whether you are forming a new business or restructuring an existing one, it is essential to choose the right company type that aligns with your business goals and legal requirements.
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