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Some of the decisions taken before the company is incorporated can and do affect the fortunes of the company.
Choosing the Wrong Name:
The name choice for your company depends on the vision you have for that company. The brand name should not be a casual afterthought. It should reinforce the product concept. Among the desirable qualities for a brand name are;
It could suggest something about the products benefits. Examples: Procold, Beautyrest, Craftsman.
It could suggest product qualities such as action, colour, etc. examples: Spic and Span, Kleenex
It could be easy to recognize, pronounce and remember. Examples: Tide, Crest.
It should be distinctive Examples Mustang, Kodak , there is hardly a film buyer who does not recognize from a distance the familiar yellow packaging of a Kodak film
Examples of problematic company names
A personalized name e.g Okeke and Sons Limited may give the immediate impression that the company is a one man business and may have a potential to stifle the growth of your company.
If you are incorporating a company as a vehicle for diverse businesses please do not choose a restrictive name such asXYZ Electronics Limited, as this might affect your long term business prospects. Choose a versatile name such as XYZ Limited. However if you intend to restrict the company to a specific business such as electronics, you earn significant mileage by using the word “electronics” in its name. Your company gains instant recognition and credibility in its line of business.
Poor understanding of Nominal Share Capital:
Many people erroneously equate the wealth of their company to the nominal share capital of the company. On giving incorporation instructions they are gearing to hit the millions in nominal share capital.
This may be applicable to the extent that shareholders contributions (paid up share capital) may be equivalent to the total nominal share capital or a fair portion. However where shareholders funds are not forthcoming (particularly with small private start-up companies) a lower share capital is advised to save on Stamp Duty which is assessed on the value of share capital.
Use the savings to beef up your working capital. Remember that share capital can always be increased as the business progresses. You may also consider issuing your shares at a premium to reduce the stamp duty.
There are however several situations where the share capital of a start-up company requires a minimum value e.g If the company would be applying for expatriate quota – N10 Million. Incorporating a Bank – N25 Billion (I am sure you know this one) and a host of others.
Off the shelf Memorandum and Articles of Association
A usual practice when incorporating companies is to pick Memorandum & Articles of Association from a similar company and adopt its contents. The only differences are in the names and addresses of the directors and shareholders.
Many company owners are in possession of Memorandum & Articles they have never read. However these off the shelf Memorandum & Articles become a problem when they are about to borrow urgent funds for a major deal and the bank finds that borrowing powers are absent in the Memorandum or when a major dispute arises amongst the board members and some discover that the quorum for meetings is 2 directors in a company of 10 directors.
No clear mode for transmission of shares
On the death of a shareholder, his shares vest on his legal or personal representatives of the deceased. This shall be the only person recognized by the company as having any title in the shares. However, while this person may receive transact and dividends on the shares, their details must first be entered in the register of members.
Unfortunately, many shareholders and directors only get to know what the Articles say about transmission of shares on the demise of one of them.
Absence of a Shareholders Agreement:
In a situation where the company being incorporated is a joint venture between different companies or persons, the need to have a shareholders agreement is often taken for granted until a problem arises. By this time, it is usually too late to rectify the error.
The Shareholders Agreement should capture the basis of the entire relationship. It is the Shareholders Agreement that deals with profit sharing, termination, conflicting business, ethics etc. It should be capable of guiding the parties in making the right decisions.
Also while you are at it, ensure that the relevant portions of the Shareholders Agreement that coincide with the usual headers in the Articles of Association are not in conflict. In the event of a conflict the Articles will be the subsisting document.
A copy of the shareholders agreement should be filed with the local office of the Corporate Affairs Commission.