Most Nigerian limited companies are incorporated as private companies that are limited by shares. This type of company is suitable for most commercial purposes. It is an ideal choice both for a freelancer or contractor who wants to start a company and for an established business that intends to expand its activities.
Private company limited by shares: what you need to know
If you are looking to incorporate your company you may be confused about whether it would be more appropriate to adopt the limited by guarantee or limited by shares model. While the two structures have several similarities, there are some crucial differences, particularly when it comes to how profits can be extracted from the company.
The most common type of company incorporation in Nigeria is the limited by shares model. This represents the optimal structure for a company that is set up with the purpose of generating profits for its directors and/or shareholders.
The limited by guarantee model, however, is more suited to not-for-profit organisations such as charities and sports clubs, where any profits made are simply reinvested into the core business activities.
What is a company limited by shares (a private limited company/LTD)?
A company limited by shares is a corporate entity that is legally separate from any directors and shareholders. As it can stand alone as a legal entity, it can enter contracts as a company and hold assets in its name.
The word limited here refers to the shareholders' limited liability. They are only responsible for any company debts up to the value of their shares within that company. No personal assets are at risk.
Companies limited by shares require high transparency. This inspires trust from the public – partners, clients, and customers – and makes your company seem more legitimate. However, it also requires that any company officers, directors, shareholders, and finances are all placed on the public record. This includes the full name, home address, and date of birth of the director, plus the full name and address of any shareholders.
Limited liability in a limited by shares company
One of the primary advantages of incorporating as a limited company, as opposed to operating as a sole trader, is that as a company director you are able to benefit from limited liability. This provides a valuable level of protection against liability for company debts in the event of the company slipping into insolvency.
So long as no fraudulent trading or any other type of misfeasance has been committed, and excluding any personal guarantees which may have been given, a director’s personal liability for the debts of their company will be limited to the value of his or her shareholding.
This differs from the position an individual operating as a sole trader would be in should the debts of their business become unmanageable. As there is no legal distinction between a sole trader’s business and themselves as an individual, any debts accrued during the course of their business activities are the responsibility of the individual.
Understanding shareholding and how shares are issued
When a company limited by shares is incorporated, at least one share must be issued; the number of shares allotted to shareholders affects the distribution of dividends, voting rights in shareholder meetings, as well as the extent of shareholders’ liability, should the company enter insolvency proceedings. Additional shares can be issued at a later stage in the event of a new business partner joining the firm, or for the purposes of securing investment. Shareholding percentages can also be altered to reflect a change in ownership through the transfer and re-allotment of existing shares.
Public v Private limited company
A company limited by shares can take one of two forms: a public limited company, or a private limited company. The main difference between the two structures comes down to how their shares can be sold and traded. As the name suggests, a public company trades publicly and is able to sell its own shares to the general public and trade on the stock exchange. A private company on the other hand is only able to sell its own shares to interested investors. The vast majority of start-ups are incorporated as private limited companies.
Features of a Private Company Limited by Shares
Here are some of the salient features of a Private Company Limited by Shares (LTD);
- Members
A private company needs to have a minimum of 1 member (as in the case of a One-Person Company) for starting its business. However, it cannot have more than 50 members, this is the maximum limit.
- Limited liability
The liability of all members or shareholders of a private limited company is limited. It means that when the company faces a loss under any circumstance, its shareholders will not be liable to sell their personal assets for payment. They will be liable to repay for only the amount of the shares subscribed or the guaranteed amount they have agreed to pay.
- Number of directors
The Act provides that a private limited company must have a minimum of one director, while the maximum number of directors is 15.
- Perpetual succession
The private limited companies keep on continuing forever. Its life or continuity is not affected by the life of its members. These companies are created by law & are also dissolved by it. Death, insolvency, or bankruptcy of any of its members does not affect the life of the business. The business enjoys perpetual succession.
- Minimum share capital
The Corporate Affairs Commission provides for a minimum issued share capital of N100,000 for private companies limited by shares. Minimum share capital is the minimum amount of assets a company must have.
- Suffix
A private limited company name must have the words ‘LIMITED’ or 'LTD' after its name. For example, if the company name is 1710MEDIA, it must write its name as ‘1710MEDIALTD’ in all its official communications and the company registration form.
- Prospectus
A prospectus is a detailed statement providing the status of company affairs. A company issues a prospectus to the public to subscribe to the company share. However, a private limited company cannot issue a prospectus as it cannot invite the public to subscribe to its shares.
- Index of members
A private company does not have to maintain an index of its members as per the Act. Whereas, a public company must maintain an index of its members.
- Securities of a Private Limited Company
A private company can issue securities to promoters and their relatives, directors, relatives, and employees. However, it is not allowed to issue securities to the public at large.
- Transferability of Shares
The Company members can transfer the shares to other members but are not allowed to transfer the shares to a person who is not a member of such a Company.
- MEMART
Both memorandum of association and the articles of association (MEMART) are required for a company formed in Nigeria. The memorandum of association is the document that sets up the company and the articles of association set out how the company is run, governed, and owned. The articles include the responsibilities and powers of the directors and the means by which the members exert control over the board of directors.
The key benefits of a Private Company Limited by Shares (LTD) Registration in Nigeria are listed below:
- Easy: Setting up a private company limited by shares is relatively cheap and straightforward.
- Simple: To set up a company limited by shares, only one shareholder and one director are required and the same person can hold both positions.
- Limited financial liability: Shareholders are personally responsible for company debts only up to the nominal value of their shares. In most cases, the shareholder's personal assets are legally protected from claims by the company’s creditors in the case of company liquidation.
- Flexibility: The founders are free to establish the desired structure of ownership and management of the company within the law. In addition, the shareholders may define special terms regarding their internal relationships with each other and with the company in the shareholder agreement.
- Profit distributions: A private company limited by shares is the optimal structure for a company that is set up for generating profits for its shareholders. A company may, at its own discretion, distribute to its shareholders either all or part of its business profits after taxation.
- Transferability: The business, including the company’s physical assets, can be transferred to new owners by means of a transfer of shares.
- Business image: With all other things being equal, incorporated companies are generally more credible than sole proprietors.
- Appreciating asset: The company itself may become a valuable asset that can be sold by its owner in the future or may be inherited by the owner’s family members.
A private company limited by shares is a type of company that offers some benefits over other types of businesses. If you are thinking about starting a business, it is important to understand the different types of businesses and what each one offers. Our team can assist you in creating a private limited company. Do not hesitate to speak to us if you have any queries.
Requirements of Private Limited Company Registration in Nigeria
Every business type has its own set of requirements before it is incorporated. The very minimum requirements of private limited company in Nigeria are:
- There must be at least one director appointed.
- All directors must be at least 16 years old.
- There must be at least one natural person appointed as a director (Not solely other companies acting as corporate directors)
- The company must have a registered office address in Nigeria.
- The chosen company name must not be exactly identical, or too similar, to any other company name currently held on the register at Companies House.
- The company must issue a minimum of one share at the time of incorporation.
- Company Secretary is an optional position for private limited companies. You can appoint one if you feel it will assist in administering your company.
- The director, secretary, and shareholders do not have to be based in Nigeria. Virtually anyone can own and manage a Nigerian private limited company but there must always be one real person who is at least 16 years of age appointed.
- Corporate bodies can act as directors, secretaries, and shareholders but there must still be another director who is a natural person. Using corporate entities as directors and shareholders can make opening a bank account more difficult in some circumstances.
- A company can be set up with one natural person as the director who also holds the shares and can use their home address as the business and registered address. You just need to keep in mind that CAC makes your home address publicly available on their website if you use it as the registered address and director's service address. This can be avoided by purchasing an address service from us on an annual basis.
Required particulars for Registering a Private Company in Nigeria
The following are particulars required for incorporation of a private company limited by shares in Nigeria:
- Name of the Company
- Amount of Share Capital
- Registered Address
- Company’s Email and Telephone Number
- Particulars of shareholders, directors, and company secretary
If you are still not sure which one to pick for your business, feel free to reach out to us and our experts will guide you in making the right decision.
Private Company Limited by Shares (LTD) Incorporation
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