Laws to note when setting up a small business in Nigeria
Whilst we cannot promise to simplify the applicability of these laws, Odunoluwa Longe, Co-founder/Lead Counsel The Longe Practice LP, an entrepreneur-focused legal practice and a Mentor on Nigeria’s largest entrepreneurship community, Mara Mentor, helps simplify the understanding of the laws regulating small business. Read, imbibe and implement.
•Laws pertaining to creation of entities
•Companies & allied matters act
Popularly referred to as CAMA is the genesis of all business entities in Nigeria. It creates the Corporate Affairs Commission, which is the regulator of almost all business entities in Nigeria and provides for the creation of various business entities and their general operating guidelines. Most common entities for SMES in Nigeria are:
•Business Name which can be used by a sole proprietor or several individuals; with the promoters having no limited liability.
II. Limited Liability Company “LTD” which may have at least 2 but not more than 50 shareholders. Shareholders liability is limited to their separate equity contribution.
III. Partnership can be formed by a maximum of 20 people who have unlimited liability for (1) themselves as individuals; (2) for every other partner in the business; and (3) the partnership as an entity. CAMA also provides for the Limited Partnership which is simply a partnership whereby some partners are able to limit their liability. At least 1 partner must be a general partner with no limited liability in a Limited Partnership
•Lagos State partnership (amendment) law, 2008
Although limited in applicability being a state law, it is instructive to mention this law as it also provides for the creation of another type of business entity known as the Limited Liability Partnership “LLP”. Currently, only Lagos State has a law permitting the creation of LLPs. The LLP is a form of partnership whereby all the partners have limited liability. Unfortunately, there is uncertainty regarding the legal status and recognition of an LLP in other parts of Nigeria outside of its state of creation.
•Other entities under CAMA that are not commonly used by SMEs include: Public Liability Company “PLC”, Company Limited by Guarantee “LTD/GTE”, Incorporated Trustees, Unlimited Liability Company (UNLTD) etc.
•Laws pertaining to taxation
“…but in this world, nothing can be said to be certain, except death and taxes”. This statement is as valid today as it was in 1789 when Benjamin Franklin made it. The general belief is that there are myriad of tax regulations at all government levels in Nigeria such that it appears a business owner would be left with nothing after paying all the requisite taxes.
Of course, this is not totally correct as taxes applicable actually depend on the business entity adopted by an SME and sometimes, the nature of business. For instance Business Names and Partnerships are not eligible to pay company imposed taxes and as such are exempt from almost all taxes at the federal level except Value Added Tax (“VAT”).
I would approach discussing taxation from the taxes payable to each government level in Nigeria:
•Federal Taxes: If your business entity is a company (whether, limited or unlimited, private or public), you have to pay companies income tax which is provided for under the Companies Income Tax Act. Other taxes payable to the federal government include withholding tax and capital gains tax on companies and Value Added Tax. There are other taxes which may be payable to the federal government depending on the type of entity, industry etc., however the highlighted taxes are almost always compulsory for all companies.
•State Taxes: Personal Income Tax, Withholding Tax and Capital Gains Tax on individuals are taxes payable in all states and generally applicable to all individuals. Some states may impose other taxes, For instance, Lagos State charges the Sales Tax
• Local Government Taxes: This is one messy taxation level that unfortunately is usually abused by most local governments in Nigeria. There are a number of taxes that may be enforced at this level such as shop and kiosk rates, tenement rates, market taxes and levies and more ridiculous ones such as radio and television licence fees, vehicle radio licence fees etc.
The above are by no means an exhaustive list of taxes payable but are generally applicable especially the mentioned federal and state taxes. I would advise the proprietor(s) of any SME to consult a lawyer for guidance on the most tax-efficient entity before proceeding to incorporate. It would help to develop a relationship with a local government official in the local government where your business is situated so as to stay informed on the necessary taxes payable at that level.
• LAWS PERTAINING TO DAILY OPERATIONS
The operating laws applicable for each SME would depend on the type of business carried out by the SME and/or the industry within which such SME operates. For instance an SME involved in production or sale of foods and drugs would be regulated by the National Agency for Food and Drug Administration & Control (NAFDAC) guidelines, an SME involved in telecommunications would be guided by the National Communications Commission (NCC) guidelines, and one that creates intangible properties would want to take cognisance of the various Intellectual Property (“IP”) laws. I would expatiate briefly on the IP laws as I get a lot of enquiries regarding these below:
A. Patents & Designs Act governs patent registration in Nigeria. An invention is patentable if it is (1) New; (2) resulted from an inventive activity and is capable of use in an industry; and (3) constitutes an improvement on a patented invention. Nigeria patent law is on a first to register basis which makes the registrant a Statutory Inventor, however, if there is an objection which is proven to the satisfaction on the patent registry, an objector may be registered as the true inventor of an invention
B. Trademarks Act governs the registration of trademarks in Nigeria. To be registrable, a trademark must have at least 1 of the following:
I. The name of the company, individual or firm represented in a special or particular manner;
II. The signature of the applicant for registration, or some predecessor in his business;
III. An invented word or words;
IV. A word or words having no direct reference to the character or quality of the goods to which the trademark applies and not being according to its ordinary signification a geographical name or surname;
V. Any other distinctive mark.
Trademarks are registered in various classes, and a violator can be prosecuted. There is also the option of getting a lawyer to write a “Cease and Desist Letter” to a violator before exploring litigation. Note that Nigerian laws at this time do not provide for the registration of service-marks although there is a bill before the National Assembly to amend this among other amendments
C. Copyright Act is applicable for the protection of (1) literary works; (2) musical works; (3) artistic works; (4) cinematograph films; (5) sound recordings; and (6) broadcasts. It is not unusual to find some people who register their business plans, codes, formulae, etc. as literary works pending the creation of the final patentable product as a protective measure whilst discussing with investors.
Whilst a single article is not able to do justice to all the laws applicable to SMEs in Nigeria, I hope some clarity has been provided as to the available business entity options, how to determine applicable taxes and the available IP protection laws. Generally, my advice for all SMEs is do not be penny wise, pound foolish; at the commencement of your business, speak to a lawyer who can advise on the various laws applicable to your own specific situation. It is always cheaper on the long run.