Many business owners intending to register their businesses have often wondered what the benefits are if they registered a company rather than a business name.
Before delving into the benefits proper, what is a company and what is a business name?
A company is a separate legal entity that can own and be owed in its own name. In law, a company is assumed to be a legal person different from the owner/promoter. This can either be a private or public company with liability limited mostly by share.
While a business name is a business established by the owner(s) in the form of a sole proprietorship or a partnership. Unlike a company, the business formed under business name registration is not separated from the owner(s) and all liabilities of the business accrue to the owner(s) with no limitation.
What then are the benefits of a company over a business name?
Below are some benefits which include but not limited to the following
Limited liability:Each owner’s liability is limited to the amount of shareholding in the company. This implies that in case of any insolvency/bankruptcy occurring, owners will only lose the amount of their shareholding in the company with other private assets protected from being taken over. This is not the case in a business name.
As soon as an insolvency triggers in a business name – sole proprietorship or partnership, the liability of the owners extended to the owners’ private assets should the business assets become insufficient to cover the liabilities. All the losses accrued to the business are borne by owners with no limitation whatsoever.
This unlimited liability characteristic of business registered as a business name poses a greater risk to the owners as all their assets including personal property, personal cars and other personal belongings would be taken over for settlement in case the business assets become insufficient.
Perpetual existence: A company, a legal person, also enjoys perpetual existence as long as the law which created it still exists. The death of the promoter(s)/owner(s) does not – in any way – bring the company into an end and in the eyes of the law, the company will continue to exist despite the demise of its owner.
This gives an opportunity for a continual succession of the company and ability to continue deliver value to its customers and owners.
In the case of business name however, the death of the owner(s) automatically terminates the business as a whole. Even an exit of just one member in case of a partnership for instance brings the previous business into an end and a new one formed simultaneously.
This feature of a company alone – perpetual existence should be attractive to anybody as succession becomes easier.
Imagine what would have happened generally if Dangote for instance has his business registered as a business name. The disruption to the supply chain in Nigeria, losses to his family and investors, and the difficulty in resuscitating the business altogether will all have a very bad impact on Nigeria economy in particular and Africa as a whole.
Access to Finance: In my personal sentiment, this represents the greatest disadvantage of having a business(es) registered as a business name instead of a company. There is so much restriction to access finance either through equity or debt if a business is not a company. Banks and other financial institutions will be reluctant to grant the business credit facilities or finance its project mainly because it poses a great risk of default to them.
Having your business registered as a company opens up access to raise finance easily. Even though, a private limited company is restricted to raise or transfer its share to the public for subscription, it has unrestricted access to banks and other financial institutions for financing. And since the importance of finance cannot be overemphasized to business, a company tends to grow more quickly than a business name.
Aside that, having access to finance give ample opportunities to businesses to manage their liquidity and overall financial performance.
In Nigeria, there are other benefits accruable which may include being able to bid for contract unrestrictedly, being able get support from government agencies such as CBN, BOI, SMEDAN more quickly and so on.
Saheed Alaya is a finance professional helping organisations and individuals make sense of their financials in a simple but outstanding way. He demystifies the financials and brings out great insights that have the potential to leapfrog the business performance of organisations and solve their most important problems. He is also passionate about alternative investments including Private Equity, Real Estate, Agro Investment and Islamic finance – providing an alternative and unique way for organisations and individuals to create and grow wealth
