WHAT ARE THE DIFFERENCES BETWEEN A BUSINESS NAME AND A COMPANY LIMITED BY SHARES?
A private company limited by shares is a legally separate business entity. It has an authorized shareholding which defines the shareholding liability. This means that the directors and shareholders of the company have limited liability in the Company.
Most often times many that want to register their businesses with the Corporate Affairs Commission (CAC) are confused about the choice to register between a business name and private limited liability company.
The difference between a business name and a private limited liability company is that a business name is registered, owned, and operated by an individual(s) only. There is no separate legal entity like the private company and such an individual is legally liable for all losses accrued to the business.
New business owners often have a lot of questions about the difference between a registered business name and an incorporated company limited by shares and which of these best suit their business needs. In light of this fact, some of the differences between a business name and a company limited by liability will be briefly discussed below.
1. A company limited by shares is required to have a director(s) and shareholder(s) while a business name is only required to have a sole proprietor or partners (proprietors).
2. A Company limited by shares is a separate legal entity that is distinct from its shareholders and directors. It can sue and be sued, own properties and other assets in its corporate name. A business name on the other hand has no distinct legal personality from the owner and can sue or be sued only in the name of the owner(s) of such a business.
3. A company limited by shares is a taxable legal person and pays its taxes to the Federal Inland Revenue Service(FIRS) in its corporate name under the Companies Income Tax Act. A business name does not pay taxes to the FIRS, rather, it is the proprietor of such a business that is required to pay taxes under the Personal Income Tax Act to the State Board of Internal Revenue.
4. A company limited by shares acquires a legal personality upon incorporation. The liabilities of the shareholders of the company are limited by the number of shares that have been allotted to such shareholders that have not been paid for in the event of winding up(shutting down of company). What this means is that if the company has debts or liabilities, the debtor cannot go after the personal assets of the shareholders of the company as they are only liable to pay for the number of shares that have been allotted to them that have not been paid for. However, if a registered business name goes bankrupt or runs into debt, the debtors can sue and recover their money from the personal assets of the owner of such a business.
5. A company limited by shares obtains a certificate of incorporation and other documents such as Memorandum and Articles of Association (MEMART) upon registration with the Corporate Affairs Commission(CAC). This is important as most organizations and government agencies require these documents to award contracts or to do business with a company. A business name on the other hand obtains a certificate of registration of business name and application for registration of business, it is limited in capacity to bid for big contracts from government agencies or other companies.
6. A company limited by shares can have a maximum of 50(fifty) for private limited liability company shareholders while a business name can have a maximum of 20 partners except for law firms and accounting firms.
7. A company limited by shares is required to file returns at the CAC and hold annual general meetings while a business name is not required to hold general meetings before reaching its decisions.
8. A company limited by shares can obtain a loan in the name of the company and can also raise funds by issuing its shares to private investors. A business name does not have shares and is mostly funded from the personal funds of the owner.
9. A company limited by shares is appropriate for medium scale to large scale businesses while a business name is appropriate for small scale to medium scale businesses.
10. A limited company may choose to go public and be converted to a public limited company (PLC), whereas a business name can only be converted to a limited liability company.
11. A business name is automatically dissolved upon the death of its founder(s) unless there are other surviving partners to carry on the business, but a limited liability company cannot be dissolved upon the death of the shareholder, the other director of the company will continue to carry on the business upon the demise of any shareholder or director. And where the company has a single director/shareholder that died, the family of such person can apply for a Letter of Administration or Probate to take over the shares of the company and appoint a new director. A limited liability company will not be dissolved until it has been officially wound up with the CAC in accordance with the law.
Finally, all of the above are distinctions between the business name and the company limited by shares. However, it is important to know that there is also a similarity between the two forms of business entities. In line with the Companies and Allied Matters Act 2020, the law governing business formation in Nigeria, either the company or business name can be set up by just a single person.
WRITTEN BY: CHAMAN LAW FIRM TEAM
TEL: 08065553671, 08024230080