Can you think of the biggest reasons why you should register your business? You need to read this article carefully.
In Africa, up to 70 percent of people who regard themselves as ‘entrepreneurs’ do not own a registered business.
How can anyone say they own a business when it doesn’t really and legally exist?
For some of these people, it’s just plain ignorance; they don’t know or understand the importance of a getting a business registered. The others, who aren’t totally ignorant, just choose to avoid the upfront cost of registration when they start their business.
If you have been running an unregistered business for sometime, this article will give you five reasons to regret your action/ignorance.
However, if you plan to start a business soon, the reasons in this article will prevent you from missing out on the benefits of a legally registered business.
I have taken the time to do quite some research for this article and will present the the legal concepts in a very simple manner with real life examples and scenarios you can relate with.
By the time you’re done reading this article, you should know exactly what you need to do to register your business.
What Is A Registered Business?
The best way to describe a registered business is to tell you a short story.
Fred is an entrepreneur who makes very beautiful shoes for men and women with the best quality leather. This has been his line of work for seven years now and thousands of people love his shoes.
Infact, his shoes have become so popular that people commonly refer to it as ‘Fred shoes’. People actually go to the market and ask for ‘Fred shoes’. Most of his customers are so loyal that they will not wear any other brand of shoes (local or foreign) except for Fred’s shoes.
Just last year, one smart entrepreneur (let’s call him John) caught a bright idea and decided to register a company and named it “Fred Shoes Company”.
It cost him time, effort and money but John went through the hassle to register his new company. Guess what? His new company makes shoes too. These shoes are also of high quality but they’re not as good as the popular Fred shoes.
But the interesting thing is, John’s company’s shoes are labeled ‘Fred Shoes’.
As you may have guessed, Fred finds out that John’s company is selling its shoes with a ‘Fred Shoes’ label. What can he do?
If he does nothing, these new shoes that carry his name will confuse his customers and he could lose sales. So he decides to sue John’s company “Fred Shoes Company”.
Who do you think will triumph when this matter goes to court?
The facts of this case are quite simple:
One person (John) owns and runs a business that is legally registered and recognized by law. The other person (Fred), although running a very successful but unregistered business, has become a victim of his own mistake. He owns and has been operating a business that doesn’t legally exist.
This is a sad example of the kind of unfortunate things that could happen when a business is not properly set up and registered.
It is often tempting to postpone or think that business registration can wait or is not really important.
The truth is, you may be building something that could become very big and popular in the future. However, if you don’t do something as basic as registering your business, all your hardwork could easily be wasted, or worse, taken over by somebody else.
In summary, this story teaches us (with a hard lesson) exactly what a registered business is. It is one that legally exists and is recognized by law. It is one that enjoys certain rights, benefits and privileges that an unregistered business cannot enjoy.
In a latter section of this article, we shall look at all the other reasons why you just have to register your company.
What are the options? What are the types of business registration available?
Before we look at the reasons why you should register your business, it’s important that you know the types of business entities that exist and how they’re different from one another.
This will help you to decide on the right type of business registration that best suits your circumstances.
Please note that the specific names and terms used to describe these entities may differ in some countries depending on their laws and legal systems. However, the general principles remain the same.
But first, there is a concept I want you to understand very well before we look at the different types of business entities that exist. The concept is called “limited liability”.
Understanding ‘limited liability’ will allow you to appreciate the differences between the different types of business entities that are available for registration.
Why is Limited Liability important?
Let’s assume that you borrowed some money from the bank to support your Laundry & Dry Cleaning business. For some reason, your business didn’t perform so well and your plan didn’t work out like you expected. However, the situation has become worse because you’re behind on your loan repayments and you now owe the bank.
Because the loan is in your name, you are personally and fully responsible (liable) for repaying the loan. If you are sued, the bank will have the right to take over any properties (assets) that are in your name (like your house and car) to recover the loan amount you owe.
This is a clear example of “unlimited liability”. In this situation, nothing you personally own will be spared until you pay back the owed amount or until you become bankrupt! Very scary indeed!
However, under a limited liability arrangement, the amount of money you can ‘lose’ is limited to a fixed sum (which is usually the amount of money you invested in the company).
With limited liability, your personal assets (house, land, car etc) are protected from any claims.
If the bank lends money to a business with limited liability, it can only recover the funds from the assets of the business. In ideal cases, the bank cannot touch the personal assets of the owner of a limited liability business. This is the beauty and benefit of limited liability. (image credit: bizfilings.com)
Remember, not all types of registered business entities enjoy limited liability.
Now that you understand the concept of limited liability, it’s time to look at the types of business entities that are available…
#1 – Sole Proprietorship
A Sole Proprietorship (also known as a sole trader or simply a proprietorship) is a type of business entity that is usually owned and operated by one person.
This type of business does not enjoy the benefits of limited liability and there is no legal distinction between the owner and the business. In the eyes of the law, the owner and the business are one and the same.
Sole proprietrships are the simplest of all business entities. They are cheap and easy to set up and require little capital.
Of course, the major downside of this business entity is its unlimited liability. The owner of this type of business bears the risk alone and may be personally liable to repay any debts the business owes.
Another disadvantage of this entity is that it’s difficult to continue if the owner dies or cannot continue running the business. There is usually a strong attachment between the entrepreneur and a sole proprietorship.
This type of entity is best for small traders, shop owners and artisans (plumbers, carpenters etc) who typically work alone in their business.
#2 – Partnerships
In its general form, a partnership is a business entity owned and managed by two or more partners.
Ordinarily, partnerships do not enjoy limited liability. However, in many countries, there are Limited Liability Partnership arrangements which limit the liability of the owners to their investment in the partnership.
Partnerships are very popular with lawyers, accountants, consultants etc where two or more partners come together to form, own and jointly manage the business.
#3 – Private Limited Liability Company
This is the most popular and common type of business entity that exists. As the name suggests, the owners of this type of business entity enjoy limited liability. As a result, the names of this type of entity usually ends with ‘Ltd’, ‘Limited’ or ‘Inc’ depending on the country and legal system.
The law sees a Limited Liability Company as a legal human being. Like natural human beings, limited liability companies can own property, borrow and lend money, sue and be sued. What they are and own are totally separate from the assets of its owners.
These are the qualities, features and benefits that make Limited Liability entities very popular with entrepreneurs and businesss people across the world.
The best part is, because this type of entity exists on its own, it can be sold or transferred to another person if the owners (shareholders) so wish.
Private Limited Liability entities are perfect for the modern day entrepreneur who wants to start a business and grow it into something big. It is suited for all kinds of industries from agriculture and manufacturing to IT and professional services. It’s a bit more expensive to set up than sole proprietorships and partnerships but the benefits are surely worth the expense.
#4 – Public Limited Liability Company (PLC)
Commonly referred to as ‘PLC’ in some countries, this type of entity is almost an exact lookalike of a Private Limited Liability Company.
The major difference is that PLCs are publicly owned and their shares are traded on stock exchanges where anyone can buy and sell its shares. Only PLCs can sell their shares on a stock exchange.
The costs of setting up a PLC are higher than all the other types of entities I have mentioned and the rules and regulations around PLCs are quite stringent.
PLCs are perfect for very large companies that may have been in business for a couple of years. Typically, most companies start as private limited liability companies before they become public limited liability companies.
5 Reasons Why You Should Register Your Business Now!
Now that you know what a registered business is and the different types of business formations that exist, it’s time to look at five strong reasons you should register your business soon.
As a result of the things I explained earlier, some of these reasons should be very obvious to you. Here they are…
1. It gives you a unique identity (and protects it too)
There is a certain pride that comes with the identity of your own business.
It’s no longer that big idea you’ve had in your head all these years. It’s now a real thing that legally exists; with its own name and address.
Some people choose their business names on emotional grounds (like their father’s, mother’s, wife’s or child’s name or even their own name). Some other people prefer to choose names that inspire while some other will go with names they want to protray good qualities about the business.
Whatever name you choose, and for whatever reason, is totally up to you.
Once you’re ready to register your business, the first thing the Business Registration Office does is to check that no other business already exists with the same name. Under law, no two businesses should have the same name to avoid confusing the public.
This search could take a few minutes or several days, depending on your country.
Once it is confirmed that the name you’ve chosen for your dream business is available (that is, nobody else is already using it), you will be allowed to go ahead with the rest of the business registration processes.
And unless your business goes bankrupt and is formally dissolved, no other person can use or register the same name ever. (image credit: businessmasons.com)
Once registered with the name you chose for it, you’re legally free to go ahead and design a logo, create business cards and letterheads, and do anything you want with the name.
Can you magine your business card with an inspiring logo and the name of your business boldly written across it and your name as CEO? That’s truly unique and inspiring.
2. It protects you from personal liability
This is arguably the biggest reason why many people have to register their business.
Without the legal protection of limited liability, you could lose your business and personal property if something goes wrong (say somebody sues you to court for heavy damages).
Imagine you started a trucking and haulage business with two trucks that carry heavy goods for customers from the sea port to the inner cities.
Unfortunately, one day, one of your trucks had a fatal accident that involved a collision and fire that killed five people.
Although your business has suffered a hit (as a result of the lost truck), that appears to be the least of your problems.
Your biggest problem is the case brought against you in court by the relatives of the people killed in that accident. They are suing you for damages of up to $250,000. Even if you sold the other remaining truck, it wouldn’t still be enough to settle such a high sum.
How much money you lose in this scenario really depends on the nature of your business.
If your business is registered as a limited liability entity, the worst that could happen is that ONLY your business will be responsible for paying the damages because it is a separate entity from you.
However, if you were running an unregistered business, you may not be entirely safe. Why? Because your personal stuff (house, cars, money in the bank etc) maybe used to settle any outstanding debts the business cannot settle.
Don’t forget, not all company types can offer this protection. Only Limited Liability type companies can do this. Sole-proprietorships and partnerships (except Limited Liability Partnerships) cannot provide protection from personal liability.
3. It makes you look serious and attracts more customers
In today’s modern world, most customers, especially corporate customers, expect a serious and responsible business to be registered.
In fact, most companies will not do business with an unregistered business. In certain cases, it’s against the law for regulatory and tax reasons.
Think about it for a moment:If your business is not registered, how can you issue receipts to customers for products you sell or services delivered?
And who exactly pays for something these days without demanding a receipt? Unless your plan for your business is to become and remain a petty trading business that sells stuff off street corners, you just have to register it to attract more discerning customers.
Nobody says you can’t survive with a business that isn’t registered. The likely outcome is that you may not grow and will probably remain small for a long time.
4. It’s easier to get bank credit and investment from investors
For banks, there are basically two categories of loans; Personal and Business loans. They’re both totally different and one cannot be used to represent the other.
As a result, most banks will gladly lend you money to buy a new car or house but none will give you money to fund a business that isn’t registered. To qualify for a business loan, the Number 1 and non-negotiable requirement is that your business must be registered. Period!
For investors, it’s the same thing. Investors are interested in giving you money for a share of your business, and not to finance your personal lifestyle.
If there’s no registered business, what exactly will you be giving them a share of?
Investors want to know that your business is organized, exists legally and is separate from your personal life and finances.
No investor would take you seriously if you’re asking for investment but you don’t already have your business registered. To them, it’s a sign of unseriousness and a lack of professionalism. You don’t want anybody to have that impression of you.
5. It’s important for continuity sake
Nestlé, Cadbury, Shell and Toyota. Do these names ring a bell?
Of course they do.
These names are big multi-billion dollar businesses that have existed for decades. In fact, most of the people who formed these companies have been dead for a long time.
Nevertheless, these businesses, which were quite small when they started many years ago, remain very big and successful today.
It’s called continuity; human beings live and die but businesses have the ability to last forever as they are transferred from one generation to another.
In Africa, it’s hard to come across businesses that outlast their founders. Just a few have.
A registered business is an asset (like a house, car and other properties) that can be passed down (as an inheritance) or sold by its owners to a new generation of people who can continue to own and run the business.
Registering your business will help you achieve your dreams of continuity.
How To Register Your Business?
Now that you understand and appreciate the benefits of getting your business registered, it’s time to let you know how you can actually register your business.
Below are 5 Frequently Asked Questions regarding business registration. Here we go…
#1 – Where can I get my business registered?
There is usually a government agency or department that’s responsible for business registration in every African country.
They may have different names but their duties are essentially the same.
In Nigeria, for example, business registration is handled by the Corporate Affairs Commission.
In Ghana, it’s called the Register General’s Department.
In Kenya, this function is handled by the Register General’s Office under the Attorney General’s Office and Ministry of Justice.
In South Africa, it’s the Companies and Intellectual Properties Commission that takes care of business registration.
To find the relevant government office in your country that’s responsible for business registration, visit this Wikipedia page for a full list.
#2 – Do I need to hire a professional to register my business?
Well, it depends on the laws of the country and the requirements of the relevant government department.
In some countries, you don’t need to hire anyone to register your business. You can actually log on to a website and do it all by yourself.
In some other countries, you will be required to hire an accredited professional (usually a lawyer or accountant) to register a business. You should contact the local government office to find out what the specific requirments are.
#3 – What do I need to get a business registered?
Some countries require that you must be 18 years old and above (and a citizen of that country) to register a business while some other countries don’t have any age or citizenship restrictions on business registration.
More importantly, a business address is usually a mandatory requirement for business registration. This address will be used to receive all official mails. And yes, you can use your home address if you’re just starting out in business.
#4 – How much does it cost to register a business?
Well, it depends on the country and the type of business you want to register.
The simple types like Sole Proprietorships and Partnerships usually cost less than say, a Limited Liability-type company.
#5 – How long does the entire process take?
Again, this depends on the country.
According to the Doing Business rankings released by the World Bank, the number of days required to complete business registration varies significantly across the African continent.
The entire process takes a short time in countries like Rwanda (2 days) but can last for longer in countries like Ethiopia (15 days), Nigeria (28 days), and Kenya (32 days).
For more information regarding business registration in all African countries, visit the Doing Business website at www.doingbusiness.org/rankings
Now you know the reasons why you should register your business. It’s time to do the right thing!
It’s been quite a long article. But I’m glad I was able to include all the essential knowledge you need to appreciate the importance of registering your business.
It may cost you some money, time and effort but it’s really a small price to pay to avoid costly damages and regret down the road. Getting your business registered is not only the right thing to do, it’s also the smart thing to do in today’s complex and fast changing business world