One of the first things that occurs to every entrepreneur, possibly even when the business idea is still evolving, is the name to give his nascent business. Many entrepreneurs simply use names that sound engaging or appealing until they run into very practical problems, the first of which is often the difficulty in opening a bank account in the desired name.
When anyone seeks to use a name other than his name and surname to carry on business, he effectively creates another persona which is, as a matter of fact, different from himself. Because this extra layer between the business owner and consumers is an easy avenue for unscrupulous persons – who may perpetrate fraud using a name different from their true names, the law is concerned to ensure that it has a handle on all the trade names used by business owners. This is where the first, and perhaps most common business form becomes relevant – the business name.
The Business Name
The business name is registered with the Corporate Affairs Commission, and is much cheaper to register than other business forms. Interestingly however, while the business name allows the business owner to use the chosen name to trade, it does not set up a legal distinction between the business owner and his business. Simply put, if everything goes bust with a business venture, its creditors can freely proceed against the business owner. This is because, as a legal matter, it is the business owner that has carried on business, although under the name of a registered business name.
That said, there are advantages to registering a business name. It is quick to register. It allows you legally carry on business with a name other than your forename and surname. Once the name is registered, the CAC will not permit another person to use the selected name for any other purpose. As noted however, the business name does not create a different person in the eye of the law. This, apart from the disadvantages of unlimited exposure to creditors, makes the business name unattractive for the purpose of attracting investment. Speaking still, from a money perspective, while more than one person may be the owner of a business name, this will generally create a partnership, a relationship that has interesting implications at law. For instance, a partner is generally jointly liable for the all business related obligations. Hence, the debts of the business will be borne by all partners usually based on their contributions.
The Limited Liability Company
The other popular business form is the Limited Liability Company (or LLC). Unlike the business name, the law creates a different person, through a process known as incorporation. Once this new person is brought to life, it can engage in business transactions, borrow, own property and be sued.
Crucial amongst its features are the twin facts that the LLC is made up of shares, which are unit of ownership in the company. Shares allow members to trade with their units of ownership and attract investment in vehicles. Second is the fact that with the LLC, the liability of the members is always limited to any outstanding amount of money not paid on the shares that they own. So if a member has fully paid for his shares, creditors will be constrained from proceeding against his personal assets. The LLC, compared to the business name, is expensive to establish and maintain.
After the initial outlay to engage a lawyer (which is necessary for the incorporation of the LLC but not for the registration of business names), it is still necessary to make returns to the CAC every year, and pay corporate tax. The company is also compelled to hold meetings and make documentary filings at the CAC – all of which require legal advice and assistance.
Still, the LLC is the preferred vehicle for most startups, and like with many other things, it is an illustration of the aphorism that “you have to spend money to make it”.
About the Author: Opeoluwa Osinubi is an Associate in the firms practice dedicated to new growth areas of the economy including start-up advisory and e-commerce