Anyone can start a business overnight whether it is selling groceries in a market stall; baking and selling cakes to friends and family; buying and reselling fashion items, providing advisory services or any other business. As long as you have a product or service to offer another party who is willing to pay for it, these activities qualify as a business and you are up-and-running.
Although it is that easy to start running a business, it is recommended that the business is formally registered. Many see the process of registering a business as an unnecessary hassle. Here are some of the many reasons and benefits why anyone that is serious about their business and who intends to develop such business in the long term should register their business.
1. Secures the business Identity and protects it
Registering your business means you have an identity that can be recognised nationally and internationally. One can decide to trade under any name to get that identity. However, it is possible that the chosen name is already taken and the owner could sue you for infringement. For instance, if my name is Nike (a popular Nigerian name) and I am selling sport shoes, I may want to call my business Nike sports. Whilst I may operate under the radar for a few months (maybe years), eventually the international sportswear brand of the same name is likely to challenge me and I will have to change the business name.
Even if that name is not registered by another organisation today, this could happen in future as long as you have not formally registered the business and protected the name. If this happens, you will have to change your business identity which you worked hard to build over the years.
It is therefore important to protect your business name before you invest in developing your business brand.
2. Essential for Raising funds
Most businesses require some form of funding either at the start-up stage or when they want to grow. Whether the business is looking for investors or is looking to take out a bank loan, financiers will need assurance that a business is legitimate before investing. Registering the business legitimises it and gives confidence to potential investors.
3. Protects Directors assets
With certain business types, the liabilities of the business are limited to any assets registered under the business. Otherwise, personal assets of the directors (such as their homes, cars and other valuables) can be used to off-set business liabilities. Business registration enables the directors to separate business assets and liabilities from their personal assets and liabilities and therefore protects the directors. Note that this protection excludes personal assets that directors put up as collateral for business loans.
Also, note that this does not apply to sole traders or registration of Business names.
4. Required to open a business bank account
A formal business structure is required to set up a business bank account. There are multiple reasons why you need a business account – including getting a business loan. When raising finance, the transactions in and out of a bank account help to validate its trading record. It is more difficult to reflect this on a personal account where credit and debits of personal affairs are mixed with those of the business.
Even where a new business is not planning to raise funds, keeping separate accounts helps a small business organise its finances. It is not advisable to mix business and personal finance as this makes it difficult to truly assess the financial health of the business.
5. Fosters client confidence
Having a formal business indicates to potential customers/clients that this is a serious business and many potential customers/clients want to know that a business is legitimate before they engage. SMEs have the opportunity to provide services to large corporates and apply for public sector contracts. Such organisations require a company registration number and informal businesses are usually ruled out of such opportunities.
6. Gives access to Supplier benefits
Similarly, many suppliers will only take a business seriously if they are formalised. Some suppliers extend credit facilities to formal businesses. Such credits (such as supply of goods in advance of full payment or vendor financing) could significantly help a small business with its cash flow. But such benefits are normally only offered to formal businesses.
7. Required for Insurance
To be able to insure your business against accidental loss, it must exist as a formal structure. Even where your business is operating from your home, most home insurance policies do not cover business assets unless you specifically request for these to be included.
Where a business has valuable tangible assets – such as machinery, property, technical equipment etc, it is recommended that such assets are valued and insured accordingly.
8. Access to tax benefits
Informal businesses usually pay tax as individuals. Personal tax rates are however usually higher than business tax rates. Therefore, informal businesses will pay more taxes on business income.
Businesses (particularly small businesses) also benefit from certain tax exemptions. These only apply where the business is formalised through registration.
In addition, owners of small businesses usually utilise some personal assets for business purposes such as using a home office or personal car or computer. A proportion of these costs (e.g. rent and car maintenance) can be considered as business expenses. This therefore reduces the reported profit and as a consequence reduces the business tax expense.
Of course, it is not all rosy. There are some regulatory obligations that formal businesses must adhere to. This include
- Filing tax returns each year
- Notifying the registrar of business of certain changes in business structure such as number of shares or names of directors (applicable to certain business types only).
Having said this, the advantages of registering a business far outweighs the statutory burden that it brings. Therefore, if you are thinking of starting a small business or if you have already started one, it is strongly recommended that you formalise your business structure as soon as possible.
If you are looking to register a business in Nigeria, visit the Corporate Affairs Commission www.cac.gov.ng for more details. For other countries, search the internet for the registrar of companies in that country. You could also contact us at Xeed Business for support.
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