DERIN FAGBURE: ‘REGISTERING YOUR BUSINESS NAME IS NOT ENOUGH TO PROTECT YOU’.
Each time I talk or write about legal structure for businesses, I think about Natural Cash Madam. Oh you mean you do not know Natural Cash Madam? The international business woman extraordinaire!! She needs no introduction. Anyway, for those of you who do not know, she is one of the biggest producers of natural juices and smoothies in the country. She has successfully built a global brand that not only prioritizes the presentation/ packaging but also understands the quest of consumers for quality products. I can testify to the quality of her smoothies. Come on friends, you should give this a try.
I am not a commission agent and I have not been hired to market her brand. I just thought to share her experience relating to legal structure with other entrepreneurs. Natural cash Madam is a lady I have known over the years and each time we spoke about expanding her business, she would happily say she was comfortable with the business name structure under which she operated. Believe me, this lady would argue vehemently for the advantages of a business name over a limited liability company. My efforts to convince her to change to a Limited Liability structure such that Natural smoothies Enterprises would become Natural smoothies and juices Ltd were futile. She would say “no Sisi Lawyer, I do not have time for all this big English!” Sometimes, she would distract me, saying her fruit supplier was on the way to deliver her weekly supplies and that was more important to her than law related matters. I guess she really was not interested in listening to my arguments in support of the limited liability business entity.
In University, I remember my lecturer always said that a limited liability company had the advantage of not being susceptible to the many shocks to which a human being is exposed. These shocks include the risk of the entrepreneur having an accident, getting sick or even becoming bankrupt. This is because a limited liability company is separate and distinct from the owner or promoter. As the name implies, the members’ liabilities for the debts and obligations of the LLC are limited to their own investment. The word investment here refers to the money you put in the business. This means that if the company gets sued for a debt it owes, your house in Ikeja GRA and your money in ABC Merchant Bank are protected, provided you did not give the lender a personal guarantee.
A limited liability company can be set up with a minimum of two shareholders and the limit of their liability is as per the value of shares they own. The finance for starting a limited company is raised by issuing shares. The people to whom the shares are issued are called shareholders. The shares cannot be issued to the general public unless it is a public limited company. I shall be discussing public companies in a subsequent post. The liability of the shareholders is limited to the amount paid by them during the purchase of the shares. For example, if the company goes into debt, they are not liable to pay to the lenders and creditors from their own personal finance. Decisions on the way the company is run are made at board meetings which are attended by the directors. The profits earned by the company can be distributed among shareholders as dividend. Alternatively, it can also be used for the expansion plans of the company, as is the case with retained profit. It must be reiterated that a company enjoys perpetual existence, which is not affected by the death of any shareholder or director.
With a business name, the Proprietor/s are personally responsible for all the affairs pertaining to the business because the law does not make any distinction between the owner and his business. In the eyes of the law, both the owner and his business are the same. Since the law does not distinguish between the owner and his business, his liability is unlimited. For example, If the business goes bankrupt, the owner will have to cough out his or her own funds to pay to the creditors and lenders.
The ‘business name’ concept is simply what most of us know as sole- trader. It is some form of one man business and the promoter has the final say as far as decision-making is concerned. He is not legally bound to listen to anyone. He may do whatever he deems to be fit. He keeps the entire profit earned by him. Similarly he also has to shoulder the entire burden of loss and all the risks relating to doing business. This puts a great burden on the promoter particularly in a developing country like ours.
In spite of the arguments listed above, in support on the limited liability concept, some may insist that a business name is generally simpler to register and costs less. For those who are trying to save cost I would say that the long-term benefits of incorporating a Company far outweigh the initial cost outlay. I am sure Natural Cash Madam would agree with me on this. Guess what guys, she came running back to me when she decided she wanted to expand her business. She incorporated a Limited liability Company, having seen that many of her projected business goals could not be met with the Business Name model. Did I forget to mention that she has taken her business to the next level and has established franchise outlets in a number of African countries. Did I hear you say from local to global?
We all like happy endings, don’t we? From a small business which started in her family kitchen to a well-known African brand. Who told you to stop dreaming? Take a cue from Natural Cash Madam!
About the Author
Derin Fagbure is a Corporate lawyer with special interest in corporate governance. She is a Senior Associate in the Transaction and Business Support Practice of Esher and Makarios.
She is a graduate of Igbinedion University and has a Master’s Degree in Corporate Law from University College London. She is a member of the African Society of Crowdfunding. Her column” in black and white “which is published in Thisday Law discusses innovations in corporate governance and finance.
She is passionate about entrepreneurs and writes regularly on legal structures for SMEs through her brand “in black and white”. She has spoken at various fora and business summits on the importance of a legal structure towards ensuring business perpetuity. Derin is passionate about advising small businesses with a view to ensuring that they outlive their founders.
An active bar member, she currently serves as the Chairman of the Young Lawyers’ Forum of the NBA Lagos Branch.