An estimated 65% of businesses in Nigeria are informal. That means they are not registered with the Corporate Affairs Commission (CAC), the Federal Inland Revenue Service, a State Inland Revenue Service, or any other federal, state, or local government regulatory agency. This in itself is not illegal. You can buy and sell as you want as an individual or a group without any legal consequence. If you are starting your business and on a shoestring budget, or less, it is advisable to keep formalising your business on the back burner till you are more stable or able to commit some of your capital to it.
However, there are limits to this approach. You cannot open a corporate bank account. You cannot access a bank loan, government grant, or loan. You cannot apply for a government contract. You cannot get most licenses, approvals, or permits for businesses issued by any authority. You will also be liable to pay taxes on your profits as income and you are personally responsible for all debts and other liabilities of the business.
Every informal business is limited and cannot take full advantage of a separate business identity. When you finally decide to turn your informal business into a formal one is a matter of scale. We recommend that you do so as soon as you can and that your business plan budget should include this cost as a line item.
The Regulatory Space
The Companies and Allied Matters Act 2020 is the main business regulation law in Nigeria, especially at the start-up stage. It is a revision of thirty-year-old legislation, and it removes many former bottlenecks in that old law: an approximate 65% reduction in fees, exemption from appointing auditors and a company secretary, the ability to create single-member companies, and the ability to sign a Declaration of Compliance without a lawyer. You can register your own business by using the online platform provided by the CAC.
This registration will now also provide a Tax Identification Number (TIN) for tax assessment purposes. Your TIN will be sent to the email account provided to the CAC at the point of registration. Most company law falls under federal law in Nigeria, but state and local governments also provide subsidiary registration that might result in government taxes or levies.
While registration and tax assessment are important parts of initialising the formal framework of your business, at least on the regulatory level, it is not all you will need going forward. There are other requirements for opening a bank account, accessing a loan or grant, or applying for a public procurement contract. These requirements differ from institution to institution. But the top two – registration and tax – are sure to be on every list. To navigate these other spaces, you will need a corporate lawyer with experience in efficient ways to get the requirements that fit your specific needs.
Tips on Compliance
- It is important to remember that regulatory compliance is part of your journey, but it may not be the start of your process. Always plan for it, work towards it, but do not let it hinder your start-up stage. You will catch up with it in due course.
- There is no substitute for a professional advising you in person. We have tried to restrict this advisory to general matters; the specifics will require a lawyer, a tax consultant, or an accountant. A formal business requires a lot of detail and thought. Do not be overwhelmed by this. Ask questions and do your research.
- Investing in a formal structure for your company will pay off in the long run as it opens you up to many opportunities in the private and public sectors. It is crucial to formalise your venture as soon as you can.
- You should think deeply about what kind of company you intend to be before you begin formalising your business. Private or public centered? Online or offline? What sector? What part of the country? All these questions will have a bearing on the kind of formal structure you build for your business.
- When you are hiring your regulatory advisers, always look for experience. It may cost more upfront, but a professional will save you a bundle over the long term. Good work is worth paying for.