Are you an entrepreneur? Do you need your business to excel without unnecessary legal hassles? Then, there are some basic legal requirements you need to check off your list as you launch your venture. It may interest you to know that Start-ups like yours have been the lifeline of great economies around the globe; despite the difficulties posed by poor infrastructure, political unrest, and insecurity, Start-up activities have been on the increase in Africa, especially in Nigeria[1], that has about 39.6 million MSMEs[2]. However, irrespective of the increase, a survey conducted by the FATE Institute on; The State of Entrepreneurship in Nigeria Report 2021; Entrepreneurship and Informality reveals that the level of informality among MSMSEs is high at about 44%.[3] What this means is that about 44% (that is a little below half) of the total number of Micro, Small, and Medium Enterprises in Nigeria have not legalized their businesses. Please note that business registration and formalization are not mandatory except if it is required by law however, formalization comes with several benefits as well as obligations.
No doubt, it requires serious strategizing and courage for an idea to be developed into a business, this is the more reason an entrepreneur should consider various requirements that would enable the business to survive and excel. As such, legal formalities should be a top priority because every form of business has an unbreakable link with the law. Law is the foundation upon which every business is built, the backbone of every corporate enterprise from its commencement to its demise and even beyond.[4] It is therefore fundamental to comply with all the legal requirements to equip and enable the business to sail smoothly. So, what are the legal issues to consider?
THE LEGAL ISSUES TO CONSIDER
The structure
The legal structure of your business is the entity type/ form through which you want to operate your business. There are several business structures in Nigeria; Business names, Sole Proprietorship, Partnership, Limited liability companies, Unlimited Liability companies, Companies limited by Guarantee, and Trusteeship. Each of the business structures has a different implication with regard to legal obligations for instance in tax payments as well as benefits. As a startup consider all the liabilities that may be associated with your business; find out and choose a structure that will be most advantageous to your business. You could engage the services of a lawyer to assist you.
Register your Intellectual Properties
Your business intellectual properties are the original and authentic inventions, marks, signs, words, phrases, designs, or logos that are peculiar to your business. Intellectual properties have been classified as copyrights,[5] trademarks,[6] and patents.[7] Registering your intellectual properties will shield you from piracy, and enable you to take legal actions against infringement. It would also enable your business to gain brand visibility.
See also: REGISTERING YOUR INTELLECTUAL PROPERTY IN NIGERIA
Permits and Licenses
The type of business you want to run determines whether your business would require permits and licenses before you commence business. In Nigeria, there are various sectors with government-established agencies, whose duties are to regulate the businesses that fall within their sectors. Examples; the Nigerian Electricity Regulatory Commission (NERC), Standard Organization of Nigeria (SON), National Agency for Food and Drug Administration Control (NAFDAC), Securities and Exchange Commission (SEC), Nigerian Communication Commission (NCC), etc. If your business deals in food and drugs and cosmetics production, it would require to be registered with NAFDAC in Nigeria, an electricity market operator would require a license from (NERC), an investment company or capital market operator to be registered with SEC and a company that intends to import and market pharmaceutical products may need to have a pharmaceutical license. A startup that disregards these permits may be liable to penalties prescribed by the law.
Legal Agreements:
Researches reveal that most businesses fail within five (5) years of starting for several reasons among which is a lack of proper documentation.[8] Formalization and documentation of agreements ensure the ease of doing business. As stated earlier, your business structure would determine the need for any or all of the agreements highlighted below:
- Founders/shareholders Agreement: Shareholders Agreement is used to secure the undisturbed running of a venture. It is a legal document created between/among co-founders of a company, that clearly states the ownership structure, decision-making, rights, responsibilities, dispute resolution, non-compete, share vesting, and various important aspects between the founders and the company.
- Non-Disclosure Agreement: It may be obvious to you that one should not share one’s confidential business information, but what about the third parties you deal with in the course of your business? Not everyone knows that vital business information should be kept confidential, therefore, play it safe by having a non-disclosure agreement, it commits whomever you share your idea with to confidentiality. If you will need to engage the services of contractors or bring in investors for financing, you may have to grant them access to your confidential business information, therefore, guard what is vital to your business, and have the right non-disclosure agreement to commit such persons (corporate or human) to confidentiality. It is legally binding and actionable where there is a breach. Your intellectual property is a valuable asset, take this required step to protect it.
- Independent contractor Agreement: As a startup, you may require the services of people who are skilled at various tasks, to set up the business, for instance setting up a website, designing the business logo, etc. It becomes expedient that a founder has a document known as an independent contractor agreement which would regulate the relationship. This agreement covers the scope of work, the cost, the termination, and ownership of the intellectual property created.
- Employment Agreement: have a defined and written agreement with employees, setting out every important detail such as the duties, scope of work, salaries, remuneration, etc. this would help to regulate the relationship. Ensure that you comply with the laws regulating employment in Nigeria.
Legislations on employment in Nigeria
There are several legislations on labor law in Nigeria but for this article, the following has been highlighted;
The Labor Act LFN 2004; makes provisions that ensure the interest of the employees are protected on issues of employment terms and remuneration
The Employee Compensation Act 2011; provides for the compensation of employees who suffer occupational diseases or injuries as a result of accidents sustained in the course of their employment.
The Pension Reform Act 2014; provides for and regulates the uniform contributory pension for both the public and private sectors in Nigeria.
The National Health Insurance Authority Act 2022; this Act repealed and improved the National Health Insurance Scheme Act 2004, whose objective was to provide health insurance to insured persons and dependents. The new Act requires all employers and employees in the public and private sectors with five (5) employees and above, informal sector employees, and all residents in Nigeria to get health insurance.
- Terms and Agreement: Startups typically neglect the formal terms of the purchase and sale agreement between the business and its customers. The agreement is vital as it makes clear the verbal agreement between parties, it states the duties, obligations, and responsibilities of the parties towards each other in respect of a prospective transaction.
Insurance Policies
The law has not made it mandatory for all businesses to take out insurance policies, however, certain high-risk businesses are required by law to insure, such as health, commercial transportation, construction, real estate, marine, and aviation.
The law, however, establishes certain Insurance policies that are mandatory for businesses to take out: Pension Reform Act 2014, section 4 of this Act mandates employers of 5 or more employees to deduct and remit a monthly pension contribution of 18% (10% from the employee and 8% from the employer) to the employee’s retirement savings account with an approved Pension Fund Administrator (PFA)
Also, section 9(3) mandates employers to maintain a Group Life Assurance policy for the employees for an amount not less than three times the yearly sum of the salary of the employee.
Employee Compensation Act 2010 requires employers to provide compensation for employees who are injured, disabled, or die in the course of their employment. Nigeria Social Insurance Trust Fund (NSITF) is an institution established for this purpose, as such employers are required to contribute 1% of their employees’ payroll to NSITF for the welfare of the employees in event of work-related injuries.
Tax
As a startup you are required to file annual returns within 18 months of incorporation with CAC and subsequently your annual returns and audited accounts once every year, this is to show that the company is still operative and to provide an update of the records of the company.
Companies are also required to pay certain taxes as well as act as tax collecting agents. Some of the taxes include:
Companies Income Tax (CIT); all companies registered in Nigeria (except petroleum companies) with an annual gross turnover of over 25 million are obligated to pay CIT. Companies with an annual gross turnover less than the stated amount are exempt from this tax obligation however, they are required to file timely Income Tax Returns.
Capital Gains Tax (CGT): 10% charged on profits realized from properties or capital assets.
Education Tax: 2% charge on profit on all companies registered in Nigeria as a contribution to the education fund.
Value Added Tax (VAT): 7.5% charged on consumer goods and services by companies and remitted to the relevant tax body.
Personal Income Tax (PITA): registered companies are required to collect a percentage charged on all employees’ salaries; Pay As You Earn (PAYE) and remit the same to the state tax agent.
Importantly, irrespective of all the tax obligations listed, there are several incentives and tax holidays provided to startups and investors by various laws such as; the Finance Act 2019, Finance Act 2020, Nigerian Industrial Development (Income Tax Relief) Act, Venture Capital Incentives Act, etc.
For more details on tax check: TAX EVASION IN NIGERIA
Irrespective of what stage your business is currently at, it is more beneficial and safer for your business to comply with the requirements of the law. Aside from the fact that incorporation affords your business a distinct legal personality, it boosts investor confidence and makes it easier for your business to access loans and grants. Having the right documents prepared and executed will shield your business from employees and third parties that may want to take undue advantage of your trade secrets. You require the services of a lawyer to help you navigate some if not all of these requirements to protect your business and help it focus on profit-making as well as prevent avoidable conflict with the law.
For more information you may contact us at [email protected].
[1] FDI Report 2021/22 African Tech Ecosystems of the Future- the dawn of a new era by Peter Bridges
[2] Business Day report by Gbemi Faminu on 27-07-22: 80% of Businesses in Africa fail within five years of
establishment.
[3] 2021 State of Entrepreneurship in Nigeria Report by FATE Foundation
[4] Companies and Allied Matters Act (CAMA) 2020
[5] Copyright Act Cap 68, Laws of the Federation of Nigeria, 2004- Section 1 (1) (a-f)
[6] Trademarks Act Cap T3 of the Federation of Nigeria, 2004- Section 67
[7] Patents and Designs Act Cap P2, Laws of the Federation of Nigeria 1988 – Section 1(1)
[8] Business Day report by Gbemi Faminu on 27-07-22: 80% of Businesses in Africa fail within five years of establishment.
