A limited company is a type of business structure. It has its own legal identity, separate from its owners (shareholders) and its managers.
Limited liability companies are distinct juristic entities with perpetual succession who require alter egos in the form of directors and shareholders to shape their structure and future.
It is vital to weigh up the difference between registered business names and limited companies, as the structure you choose could impact everything from profits to paperwork. Avoid rushing into any decision and speak to an accountant or solicitor if you’re unsure, as their expertise can be invaluable when it comes to the tax facts.
What are the differences between a registered business name and a Limited company?
The bulk of the Nigeria’s self-employed operate as registered business names. This legal structure is the choice of many because of its simplicity. Working as a registered business name suits many aspiring and established businesses. As it is easy to set up and brings relatively few legal responsibilities,
On the flip side, registered business names face unlimited liability. This means that there is no legal distinction between the owners and their business. In other words, should they mount up big business debts the owners will be left personally liable. Which can be a worrying prospect for anyone taking substantial financial risks.
Furthermore, raising finance can be tricky for registered business names, as banks and other investors tend to prefer limited companies. This limits the expansion opportunities of registered business names.
Whilst they may have their benefits, registered business names are not always tax efficient. When you are a registered business name, you pay tax on any profits you make. Without wishing to state the obvious, your profit is the difference between the sales you have made and the money you have spent.
When you operate a limited company, you extract cash differently. There are two “incomes” which are taxed – the income the business makes (in companies income tax) and the income you make (in personal income tax). For registered business names, extracting cash from the business is easy. You can take money out of the business as drawings and incur no additional tax for taking it. All you need to do is make sure you keep accurate records for the tax authorities when it becomes due.
With a limited company, any money you draw you have to take out as either salary or dividends. There is paperwork and process behind both. You can only withdraw dividends from retained profit. If you’re not showing a profit, you cannot take out dividends.
The taxman considers your profit as your income. Depending on your circumstances, setting up a limited company could be a better option after reaching a certain level of profitability. What’s more, limited companies also offer limited liability, meaning that there is a legal distinction between you and your business.
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