UNDERSTANING THE LEGAL FRAMEWORK FOR SMALL SCALE BUSINESS

 Types Of Business Organization

 Outline Legal Form Of Business
 Regulatory Status And Formation Of Small
 Legal environment influencing businesses

TYPES OF BUSINESS ORGANISATIONS

A business is an organization that uses economic resources or inputs to provide goods or services to
customers in exchange for money or other goods and services. Business organizations come in different
types and forms. There
are 4 Types of Business,

1. Service Business
A service type of business provides intangible products (products with no physical form). Service type
firms offer professional skills, expertise, advice,
and other similar products.
Examples of service businesses are: schools, repair shops, hair salons,
banks, accounting firms, and law firms.

2. Merchandising Business
This type of business buys products at wholesale price and sells the same at retail price. They are known
as "buy and sell" businesses. They make profit by selling the products at prices higher than their purchase
costs. A merchandising business sells a product without changing its form.
Examples are: grocery stores, convenience stores, distributors, and other
resellers.

3. Manufacturing Business
Unlike a merchandising business, a manufacturing business buys products with the intention of using
them as materials in making a new product.
Thus, there is a transformation of the products purchased. A manufacturing business combines raw
materials, labor, and factory overhead in its production process. The manufactured goods will then be sold
to customers.

4. Hybrid Business
Hybrid businesses are companies that may be classified in more than one type of business. A restaurant,
for example, combines ingredients in making a fine meal (manufacturing), sells a cold bottle of wine
(merchandising), and fills customer orders (service). Nonetheless, these companies may be classified
according to their major business interest. In that case, restaurants are more of the service type – they
provide dining services.

OUTLINE LEGAL FORM OF BUSINESS

These are the basic forms of business ownership:

1. Sole Proprietorship
A type of business unit where one person is solely responsible for providing the capital and bearing the
risk of the enterprise, and for the management of the business. A sole proprietorship is a business owned

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by only one person. It is easy to set-up and is the least costly among all forms of ownership. The owner
faces unlimited liability; meaning, the creditors of the business may go after the personal assets of the
owner if the business cannot pay them.The sole proprietorship form is usually adopted by small business
entities.

Characteristics of sole proprietorship form of business organization

(a) Single Ownership: The sole proprietorship form of business organization has
a single owner who himself/herself starts the business by bringing together all the resources.

(b) No Separation of Ownership and Management: The owner himself/herself manages the business as
per his/her own skill and intelligence. There is no separation of ownership and management as is the case
with company form of business organization. A sole proprietor contributes and organizes the resources in
a systematic way and controls the activities with the objective of earning profit.

(c) Less Legal Formalities: The formation and operation of a sole proprietorship
form of business organization does not involve any legal formalities. Thus, its formation is quite easy and
simple.

(d) No Separate Entity: The business unit does not have an entity separate from the owner. The
businessman and the business enterprise are one and the same, and the businessman is responsible for
everything that happens in his business unit.

(e) No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone. At the same time, the
entire loss is also borne by him. No other person is there to share the profits and losses of the business. He
alone bears the risks and reaps the profits.

(f) Unlimited Liability: The liability of the sole proprietor is unlimited. In case of loss, if his business
assets are not enough to pay the business liabilities, his personal property can also be utilized to pay off
the liabilities of the business.

(g) One-man Control: The controlling power of the sole proprietorship business always remains with the
owner. He/she runs the business as per his/her own will.

Merits of Sole proprietorship

(a) Easy to Form and Wind Up.
(b) Quick Decision and Prompt Action.
(c) Direct Motivation.
(d) Flexibility in Operation.
(e) Maintenance of Business Secrets.
(f) Personal Touch.

Limitations of sole proprietorship

(a) Limited Resources.
(b) Lack of Continuity.
(c) Unlimited Liability.
(d) Not Suitable for Large Scale Operations.
(e) Limited Managerial Expertise.

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2. Partnership
A partnership is a business owned by two or more persons who contribute resources into the entity. The
partners divide the profits of the business among themselves. In general partnerships, all partners have
unlimited liability. In limited partnerships, creditors cannot go after the personal assets of the limited
partners.When people pull resources together for business purposes each of such people is regarded as
partners ,whereas the emanating entity is described as partnership. It is therefore , a business that is co-
owned by two or more parties .

Partnership Deed
According to Nwokoye and Ahiazu (1984) a partnership agreement ,also known as Article of partnership
or Deed of partnership , is a written contractual document binding all member of the partnership and
spelling out all aspect of operation of the partnership. The agreement is best drawn by a lawyer who is in
a better position to understand such matter . The document contains several guiding conditions , including
the following

1. Name of business , the partners and their addresses

2. The amount of capital contributed or to be contributed
3. Ratio for profit or loss sharing
4. Method of admitting new partners
5. Guideline for expelling erring partners
6. The right and duties of each members
7. Duration of partnership etc
8. Provisions for arbitration of disputes .

Characteristics of partnership form of business organisation

Based on the definition of partnership as given above, the various characteristics of partnership form of
business organisation, can be summarised as follows:

(a) Two or More Persons: To form a partnership firm atleast two persons are required. The maximum
limit on the number of persons is ten for banking business and 20 for other businesses. If the number
exceeds the above limit, the partnership becomes illegal and the relationship among them cannot be called
partnership.

(b) Contractual Relationship: Partnership is created by an agreement among the persons who have agreed
to join hands. Such persons must be competent to contract. Thus, minors, lunatics and insolvent persons
are not eligible to become the partners. However, a minor can be admitted to the benefits of partnership
firm i.e., he can have share in the profits without any obligation for losses.

(c) Sharing Profits and Business: There must be an agreement among the partners to share the profits and
losses of the business of the partnership firm. If two or more persons share the income of jointly owned
property, it is not regarded as partnership.

(d) Existence of Lawful Business: The business of which the persons have agreed to share the profit must
be lawful. Any agreement to indulge in smuggling, black marketing etc. cannot be called partnership
business in the eyes of law.

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(e) Principal Agent Relationship: There must be an agency relationship between the partners. Every
partner is the principal as well as the agent of the firm. When a partner deals with other parties he/she acts
as an agent of other partners, and at the same time the other partners become the principal.

(f) Unlimited Liability: The partners of the firm have unlimited liability. They are jointly as well as
individually liable for the debts and obligations of the firms. If the assets of the firm are insufficient to
meet the firm’s liabilities, the personal properties of the partners can also be utilised for this purpose.
However, the liability of a minor partner is limited to the extent of his share in the profits.

(g) Voluntary Registration: The registration of partnership firm is not compulsory. But an unregistered
firm suffers from some limitations which makes it virtually compulsory to be registered. Following are
the limitations of an unregistered firm.

(i) The firm cannot sue outsiders, although the outsiders can sue it.
(ii) In case of any dispute among the partners, it is not possible to settle the dispute through court of law.
(iii) The firm cannot claim adjustments for amount payable to, or receivable
from, any other parties.

Merits of partnership form

(a) Easy to Form

(b) Availability of Larger Resources
(c) Better Decisions
(d) No separate legal entity
(e) Sharing of Risks
(f) Better management
(g) Benefits of Specialisation
(h) Protection of Interest
(i) Secrecy

Limitations of partnership form

A partnership firm also suffers from certain limitations. These are as follows:

(a) Unlimited Liability

(b) Instability
(c) Limited Capital
(d) Non-transferability of share
(e) Possibility of Conflicts
(f) Profit sharing
(g) Low continuity potential :the death , insanity or imprisonment of a member , especially a general
partner can result in the death or collapse of the partnership business .

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 Types of partners

Source: NWACHUKWU PI 2019

(A) Based on the extent of participation in the day-to-day management of the firm partners can be
classified as ‘Active Partners’ and ‘Sleeping Partners’. The partners who actively participate in the day-
to-day operations of the business are known as active partners or working partners. Those partners who
do not participate in the day-to-day activities of the business are known as sleeping or dormant partners.
Such partners simply contribute capital and share the profits and losses.

(B) Based on sharing of profits, the partners may be classified as ‘Nominal Partners’ and ‘Partners in
Profits’. Nominal partners allow the firm to use their name as partner. They neither invest any capital nor
participate in the day-today operations. They are not entitled to share the profits of the firm. However,
they are liable to third parties for all the acts of the firm. A person who shares the profits of the business
without being liable for the losses is known as partner
in profits. This is applicable only to the minors who are admitted to the benefits of the firm and their
liability is limited to their capital contribution.

(C) Based on Liability, the partners can be classified as ‘Limited Partners’ and ‘General Partners’. The
liability of limited partners is limited to the extent of their capital contribution. This type of partners is
found in Limited Partnership firms in some European countries and USA. The partners having unlimited
liability are called as general partners or Partners with unlimited liability. It may be noted that every
partner who is not a limited partner is treated as a general partner.

(D) based on the behaviour and conduct exhibited; there are two more types of partners besides the ones
discussed above. These are
(a) Partner by Estoppels; and
(b) Partner by Holding out.

A person, who behaves in the public in such a way as to give an impression that he/she is a partner of the
firm, is called ‘partner by estoppels’. Such partners are not entitled to share the profits of the firm, but are
fully liable if somebody suffers because of his/her false representation. Similarly, if a partner or

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partnership firm declares that a particular person is a partner of their firm, and such a person does not
disclaim it, then he/she is known as ‘Partner by Holding out’. Such partners are not entitled to profits but
are fully liable as regards the firm’s debts.

3. Corporation
A corporation is a business organization that has a separate legal personality from its owners. The owners
(stockholders) enjoy limited liability and also have limited involvement in the company's operations. The
shareholders appoints Board of Directors to oversee the business .The board of directors, an elected group
from the stockholders, controls the activities of the corporation, set goals and hold management
accountable for achieving them and hire and evaluate the top executive , generally called the CEO . the
board also approves the distribution of income to share holders in the form of cash payment called
dividends .
A corporation is defined as a business organization owned by a group of share holders , each of who
enjoys limited liability and has the ability to raise capital by selling share to the public ( Ibrahim et al
2012) . Corporation are owned by shareholders or stockholder who invest money in the business by
buying share of stock . The portion of the corporation they own depends on the percentage of stock they
hold .For example , if a corporation has or own 100share of stock , and you own 40share , you own 40
percent of the company .A corporation differs from sole proprietorship and partnership because it’s a
legal entity that is entirely separate from the parties who own it .

The following are the type of corporation

1. Public company
This type of company is formed to provide the general public with opportunity to invest in and
share profit of the enterprise without direct participation in the life of the of the organization. It is
characterized by
 Minimum of seven member and maximum of is infinitum
 Share transferability through the stock exchange market
 Public announcement of audited annual report of account
 Issuance of prospectus to the public to subscribe for shares .

The document required for registration include the following

i. Memorandum of Association : this document specifies the term under which

the company will function and it contain information:
 The name of the company with Limited as the last word to inform the
public that it is a limited liability company
 Location of the company registered office
 Goal and objectives of the company
 Procedure for making alteration in the memorandum.

ii. Article of Association : This document explains the expected internal

mechanism of the company and contains the following information :
 Modus for issuing and transferring shares
 Power and responsibility of board of directors
 Method for auditing the companies account

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 iii. The Prospectus : the document provides important information concerning the
company to guide the public on investment matter .At the completion of the
processes , the registrar of companies issues a certificate of incorporation that
gives the company the legal and economic impetus to function and the document
is often displayed within the companies premises for people to see .

2. Private company
This type of company is formed to enable private operators to carry on a business which they
control and whose profit they share. In addition to all other conditions , the law requires that the
following condition must be met to qualify as a private company in Nigeria
 The member must range from a minimum of two and maximum of fifty
 Its shares must not be offered to the general public
 No member must transfer share without the approval and consent of other stockholders .

3. Statutory corporation
This type of company is created by federal or state government through act of parliament. It is a legal
entity that is managed by a Board of Directors appointed by the government and it operates like the
limited liability company .Example of this type of company include the railway corporation ,Rivers state
news paper corporation , Ajokuta steel company . They are established in a area of strategic national
priority where huge capital is required and where citizens are to be shielded from exploitation of private
capitalist .

In addition to those basic forms of business ownership, these are some

other types of organizations that are common today:

4. Limited Liability Company

Limited liability companies (LLCs), are hybrid forms of business that have characteristics of both a
corporation and a partnership. An LLC is not incorporated; hence, it is not considered a
corporation.Nonetheless, the owners enjoy limited liability like in a corporation. An LLC may elect to be
taxed as a sole proprietorship, a partnership, or a corporation.
Memorandum of Association - describes what company has been formed to do
Articles of Association - internal rules covering:
What directors can do
Voting rights of shareholders
Limited liability means that investors can only lose money they have invested.
Encourages people to finance company
Limited liability also means that they can only recover money from existing assets of business. They
cannot claim personal assets of shareholders to recover amounts owed by company.

5. Cooperative
Cooperative Society is defined as “a society, which has its objectives for the promotion of economic
interests of its members in accordance with cooperative principles.”A cooperative is a business
organization owned by a group of individuals and is operated for their mutual benefit. The persons
making up the group are called members. Cooperatives may be incorporated or unincorporated. Some
examples of cooperatives are: water and electricity (utility) cooperatives, cooperative banking, credit
unions, and housing cooperatives.

Characteristics of cooperative society

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Based on the above definition we can identify the following characteristics of cooperative society form of
business organization:

(a) Voluntary Association: Members join the cooperative society voluntarily i.e., by their own choice.
Persons having common economic objective can join the society as and when they like, continue as long
as they like and leave the society and when they want.

(b) Open Membership: The membership is open to all those having a common
economic interest. Any person can become a member irrespective of his/her caste, creed, religion, colour,
sex etc.

(c) Number of Members: A minimum of 10 members are required to form a cooperative society. In case
of multi-state cooperative societies the minimum number of members should be 50 from each state in
case the members are
individuals. The Cooperative Society Act does not specify the maximum number of members for any
cooperative society. However, after the formation of the society, the member may specify the maximum
member of members.

(d) Registration of the Society: In India, cooperative societies are registered under the Cooperative
Societies Act 1912 or under the State Cooperative Societies Act. The Multi-state Cooperative Societies
are registered under the Multi-state Cooperative Societies Act 2002. Once registered, the society becomes
a separate legal entity and attains certain characteristics. These are as
follows.

(i) The society enjoys perpetual succession

(ii) It has its own common seal
(iii) It can enter into agreements with others
(iv) It can sue others in a court of law
(v) It can own properties in its name

(e) State Control: Since registration of cooperative societies is compulsory, every cooperative society
comes under the control and supervision of the government. The cooperative department keeps a watch
on the functioning of the societies. Every society has to get its accounts audited from the cooperative
department of the government.

(f) Capital: The capital of the cooperative society is contributed by its members. Since, the member’s
contribution is very limited, it often depends on the loan from government and apex cooperative
institutions or by way of grants and assistance from state and Central Government.

(g) Democratic Set Up: The cooperative societies are managed in a democratic manner. Every member
has a right to take part in the management of the society. However, the society elects a managing
committee for its effective management. The members of the managing committee are elected on the
basis of one-man one-vote irrespective of the number of shares held by any member.
It is the general body of the society which lays down the broad framework within which the managing
committee functions.

(h) Service Motive: The primary objective of all cooperative societies is to provide services to its
members.

(i) Return on Capital Investment: The members get return on their capital investment in the form of
dividend.

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(j) Distribution of Surplus: After giving a limited dividend to the members of the society, the surplus
profit is distributed in the form of bonus, keeping aside a certain percentage as reserve and for general
welfare of the society.
Types of cooperative societies
Some of the important types are given below.
(a) Consumers’ Cooperative Societies: These societies are formed to protect the interest of consumers by
making available consumer goods of high quality at
reasonable price.

(b) Producer’s Cooperative Societies: These societies are formed to protect the interest of small producers
and artisans by making available items of their need for production, like raw materials, tools and
equipments etc.
(c) Marketing Cooperative Societies: To solve the problem of marketing the products, small producers
join hand to form marketing cooperative societies.

(d) Housing Cooperative Societies: To provide residential houses to the members, housing cooperative
societies are formed generally in urban areas.

(e) Farming Cooperative Societies: These societies are formed by the small farmers to get the benefit of
large-scale farming.

(f) Credit Cooperative Societies: These societies are started by persons who are in need of credit. They
accept deposits from the members and grant them loans
at reasonable rate of interest.
Merits (Advantages)
§ Easy to form
§ Limited liability
§ Open Membership
§ State Assistance
§ Stable life
§ Tax concessions
§ Democratic Management

Limitations (Disadvantages)
§ Limited Capital
§ Lack of Managerial Expertise
§ Less Motivation
§ Lack of Interest
§ Dependence on Govt.

Legal Environment Influencing Businesses

In business , Environment simply means set of diverse and dynamic factors that affects the
operation or functionality of a business enterprise . We have both the internal and external
environmental factors ‘THE Legal environment is one of the factors in the external environment.

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The legal environment of business refers to the code of conduct that defines the legal
boundaries for business activity. To understand these boundaries, it is essential to first have a
basic understanding of the law and how it affects businesses and business practices .Any
business that is organized as a legal entity is subject to the state law that governs its operation and
conduct. There are different types of business entities. For example, corporations, limited partnerships,
partnerships, limited liability partnerships, limited liability limited partnerships and limited liability
companies all of which have different legal status and issues.We have external environment of business
among which we will look at the legal environment and how it influences business activities . The
nature of business spans over a number of legal realms, all of which are continuously influenced
by the needs and demands of the business community, consumers, and the government. the
following are few of legal environmental factors

 Laws on Production or Sales

The production or sale of certain goods is prohibited, or at least severely restricted in

many countries. This includes, among others, selling of dangerous drugs, guns and
explosives etc

 Consumer Protection
Most countries have laws ensuring customers are being treated fairly by businesses.
This includes the act regulating weights and measurements, ensuring that goods sold
actually are the weight or size they are sold at, and the Trade Description Act, making
misleading descriptions of products illegal
Other laws include the Consumer Credit Act, ensuring consumers are aware of loan
durations, interest rates etc when taking out a loan, as well as receiving copies of
credit agreements, and the Sale of Goods Act, making it illegal to sell faulty or
damaged goods. The return of goods and refunds, etc, are also governed by laws

 Employee Protection
Laws to protect employees include laws against unfair discrimination based on race,
color, religion, sex, or age; laws against unfair dismissal and sexual or other
harassment; health and safety laws and laws regulating minimum wages.

 .Tax and Financial Laws

These laws vary between countries, but generally regulate accountancy practices,
interest rates on loans, taxes etc. Businesses are expected to provide sufficient
documentation of income and expenditure, It is well known that every country has a
number of legal regulations to ensure that the interests of business organizations do not run
counter to national interests. Right from the stage of incorporation of organizations, their
listing in stock exchange, redress of customer complaints, payment of tax to government,
manufacturing practices, human resources development to pricing of products and services, a
number of legal regulations have to be fulfilled.

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  Weight and Measures Act: These laws ensure that the goods sold are weighed on Standard
weighting equipment.
 Trade Description Act: This law ensures that it is illegal to deliberately give misleading
impression about products.
 Consumer Credit Act: According to this Act, consumers should be given information of the
credit agreement and should be made aware of the interest rates, length of loan while taking a loan.

 Sale of Goods Act: This Act declares that It is illegal to sell products with flaws or problems
and that any goods sold conforms to standards .

Regulatory Status And Formation Of Small

The intention of any government and other approved bodies who set regulations to run businesses are
so that there can be assurance of quality and level playing ground for all. This means that businesses
especially those just starting up or running on a small scale must pay attention to these regulations so
they aren’t on the wrong side of the law. Some of these regulations include:
CAMA- The Companies and Allied Matters 1990 is the company law of Nigeria. This law regulates
the different ways in which business may be carried out and is divided into three parts, each part
dealing with one of those ways. The parts are Companies, Business Names, and Incorporated
Trustees. Registration of businesses under the Act is carried out by and at the Corporate Affairs
Commission (CAC) The head office of CAC is in Abuja, the capital of Nigeria.
Companies Income Tax - The Companies Income Tax Act (CITA) governs the taxation of
companies other than those carrying out petroleum operations. : If your business entity is a company
(whether, limited or unlimited, private or public), you have to pay companies income tax which is provided for
under the Companies Income Tax Act. The tax is self-assessed on a preceding year basis, i.e., the
accounting period preceding the government’s fiscal year.

Personal Income Tax - The legal framework for the taxation of individuals and unincorporated
entities in Nigeria is the Personal Income Tax Act (PITA), CAP, LFN 2004 as amended. PITA is
administered by the state governments except in respect of persons employed in the Nigerian armed
forces and the police other than in a civilian capacity; officers of the Nigerian foreign services;
residents of Abuja; and non-residents who derive income from Nigeria. Some states may impose other
taxes, For instance, Lagos State charges the Sales Tax

SON Approvals – The Standard Organization of Nigeria requires companies in Nigeria that are into
manufacturing and importation of unassembled goods to register their products with them. They
enforce standardization processes.

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LASSA Approval – Lagos State Signage Agency (LASSA) approves the placement of signage,
billboards etc. in Lagos. Some states have already followed Lagos State by also inaugurating their
own Signage Agencies. Common displays such as having the name of your company on a wall or a
stand alone object require LASSA approvals which can be obtained after following specified designs
and paying fees
Monthly employee deductions (Pension, NHF, PAYE) – Employee deductions are statutory
payments all employers are expected to remit to respective bodies on behalf of their employees.
Pension Fund deductions are remitted to the Pension Fund Custodians, NHF (National Housing
Fund), which is a contribution to the fund by employees to enable them access mortgage loans, is
contributed to the Federal Mortgage Bank and PAYE is the statutory income tax employees pay from
their monthly salaries to the resident State Government. Failure to comply attracts various penalties
as prescribed by law.
Local Government Permits and Levies – The Local Governments oversees several permits such as,
Waste Disposal, Environmental Permits, etc. They take these levies seriously and can be quite
persistent with collection. Default in payment of levies can lead to threat of closure of your premises.
These regulations sometimes require some professional assistance from lawyers, accountants and
other professionals as the regulation requires.
LAWS PERTAINING TO DAILY OPERATIONS
The operating laws applicable for each SME would depend on the type of business carried out by the SME
and/or the industry within which such SME operates. For instance an SME involved in production or sale of
foods and drugs would be regulated by the National Agency for Food and Drug Administration & Control
(NAFDAC) guidelines, an SME involved in telecommunications would be guided by the National
Communications Commission (NCC) guidelines, and one that creates intangible properties would want to take
cognizance of the various Intellectual Property (“IP”) laws. I would expatiate briefly on the IP laws

a. Patents & Designs Act governs patent registration in Nigeria. An invention is patentable if it is (1) New; (2)
resulted from an inventive activity and is capable of use in an industry; and (3) constitutes an improvement on
a patented invention.
b. Trademarks Act governs the registration of trademarks in Nigeria. To be registrable, a trademark must
have at least 1 of the following:
i. the name of the company, individual or firm represented in a special or particular manner;

ii. the signature of the applicant for registration, or some predecessor in his business;

iii. an invented word or words;

iv. a word or words having no direct reference to the character or quality of the goods to which the trademark
applies and not being according to its ordinary signification a geographical name or surname;

v. any other distinctive mark.

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Trademarks are registered in various classes, and a violator can be prosecuted.

c. Copyright Act is applicable for the protection of (1) literary works; (2) musical works; (3) artistic works;
(4) cinematograph films; (5) sound recordings; and (6) broadcasts. It is not unusual to find some people who
register their business plans, codes, formulae, etc as literary works pending the creation of the final patentable
product as a protective measure whilst discussing with investors.
Whilst a single article is not able to do justice to all the laws applicable to SMEs in Nigeria, I hope some
clarity has been provided as to the available business entity options, how to determine applicable taxes and the
available IP protection laws. Generally, my advice for all SMEs is do not be penny wise, pound foolish; at the
commencement of your business, speak to a lawyer who can advise on the various laws applicable to your
own specific situation. It is always cheaper on the long run.

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