Legal Framework For Establishing a Family Business in Nigeria.

In Nigeria, where small and medium-sized enterprises (SMEs) form the backbone of the economy, family businesses are particularly crucial because they are significant tools for promoting job creation, wealth generation, and economic development in Nigeria.

While family businesses in Nigeria are famous for running confectioneries, supermarkets, clothing and fashion companies, there are also renowned companies like the First City Monument Group, GiG Group which are largescale thriving models of family owned businesses and have proven to be successful in transferring the baton of leadership of these organisations to the next generation of family members. This article delves into the essential legal elements aspiring family business owners should consider in navigating the Nigerian business terrain.

1. Choosing the Right Business Structure

The first step in establishing a family business in Nigeria is choosing the appropriate business structure that aligns with the family business’ goals, the nature of the business, and the level of liability the family is willing to assume.

Under CAMA 2020, setting up a legal entity like a private liability partnership, “LLP”, private liability company limited by shares, “LTD”, or public liability company limited by shares guarantees perpetual succession compared to the structure of a sole proprietorship and shield members of the family business from personal liability when the business faces crisis.

2. Compliance with Regulatory Requirements

Establishing a family business in Nigeria involves complying with various regulatory requirements. These requirements vary depending on the nature of the business and the industry in which it operates. Some of the key regulatory requirements include:

(i) Tax Registration: Every business in Nigeria is required to register with the Federal Inland Revenue Service (FIRS) for tax purposes. This includes obtaining a Tax Identification Number (TIN) and registering for Value Added Tax (VAT) where applicable. Businesses must also comply with other tax obligations, such as filing annual tax returns and remitting company income tax to FIRS where turnover of above NGN25,000,000 is realised by a company, in addition to remitting personal income tax to the state government. It is also important to state that there are incentives for complying with tax obligations. For instance, mandatory and/or voluntary contributions by the employers and employees to schemes approved by the Penson Reform Act 2014, (PFA) are tax deductible.

(ii) Industry-Specific Licenses and Permits: Depending on the nature of the business, certain industry-specific licenses and permits may be required for operating in certain sectors of the economy and can be obtained by applying  to the related government institutions. For instance logistics companies must obtain the license to operate from the Nigerian Postal Services, (NiPOST), while the food and beverage companies must obtain a license from the National Agency for Food and Drug Administration and Control (NAFDAC) and manufacturing companies from the Manufacturers Association of Nigeria (MAN). Also businesses in the telecommunications and eCommerce sectors would also need to be licensed by the Nigerian Communications Commission (NCC) and National Information Technology Development Agency (NITDA) respectively.

(iii) Environmental Compliance: Businesses operating in sectors that impact the environment, such as manufacturing, construction, mining, oil and gas, must comply with environmental regulations set by agencies such as the National Environmental Standards and Regulations Enforcement Agency (NESREA), the Nigerian Upstream Petroleum Regulatory Commission, (NUPRC), The Nigerian Midstream and Downstream  Petroleum Regulatory Agency, (NMDPRA) to mention a few.

(iv) Employment Laws: Family businesses with staff must adhere to Nigerian labor laws, including the Labor Act, which governs employment contracts, wages, working conditions, and employee rights. In addition, the PRA provides that employers with staff strength of at least 15 employees are required to open retirement savings account and remit voluntary pension contributions of at least 18% to Pension Fund Administrators. Family businesses who intend to attract talent can also adopt good corporate culture by registering staff with Health Management Organisations in securing staff motivation which impacts the operations of the family business. For instance in Lagos, the state government mandates all local employers to obtain Corporate Identification Numbers by registering with the Lagos State Health Management Agency and enroll staff on the state scheme for basic health package before procuring any supplemental private health coverage. It is also essential for employers to register employees with the National Social Insurance Trust Fund (NSITF) in providing for employee compensation.

(v) Data Compliance Requirements for Online Businesses: Family businesses deploying websites and mobile applications must integrate Terms and Conditions (T&C) Agreements outlining terms of sale, customer rights, payment, and liability, in addition to Privacy Policy, which should specify how a customer’s data is collected, used, and protected. Both documents should comply with the provisions of the Nigeria Data Protection Act (NDPA) which requires data controllers and processors to protect user data by ensuring confidentiality, integrity, and availability. Family businesses must also ensure that in collecting user data, terms and condition agreements and privacy policy of these digital platforms must seek the user’s consent, process data lawfully, and implement security measures. Also, users have rights to access, correct, and request deletion of their data, while breaches must be reported promptly to the relevant authorities.

3. Corporate Governance and Family Governance

One of the challenges of running a family business is balancing the interests of the family with those of the business. Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. In a family business, corporate governance is equally important as it ensures that family members understand their roles and responsibilities within the business.

To establish effective governance in a family business, the following measures should be considered:

(I) Board of Directors: A well-constituted board of directors can provide oversight and strategic direction for the business. In a family business, it is advisable to include both family members and independent directors on the board to ensure objectivity.

(II) Board Charter: This is a formal document that outlines the family’s values, vision, and rules governing the business. It establishes checks and balances, measures of performance and methods of resolving conflicts among family members. It is also an essential guide for decision-making.

(III) Succession Planning: Succession planning is critical for the continuity of a family business. It involves identifying and grooming the next generation of leaders to take over the business. A clear succession plan ensures a smooth transition of leadership and reduces the risk of disputes.

4. Dispute Resolution

Disputes are inevitable in any business, including family businesses. However, the close-knit nature of family businesses can make disputes more challenging to manage. It is essential to have mechanisms in place for resolving disputes amicably. This may include:

(I) Mediation: Mediation is an alternative dispute resolution (ADR) method that can help resolve conflicts without resorting to litigation. These methods are often faster, less adversarial, and more cost-effective in managing relationships than resorting to litigation.

(II) Family Council: A family council is a formal body within the family business that addresses issues related to family dynamics, succession, and conflicts. It provides a forum for family members to discuss and resolve disputes before they escalate.

5. Intellectual Property Protection

Protecting the intellectual property (IP) of a family business is crucial to safeguarding its competitive advantage. IP assets may include digital assets, trademarks, copyrights, patents, and trade secrets. In Nigeria, IP protection is governed by various laws, including the Securities and Exchange Commission Regulation Rules, on Issuance, Offering Platform and Custody of Digital Assets, Trademarks Act, Patents and Designs Act, and Copyright Act.

To protect IP, family businesses should consider:

(I) Trademark Registration: A trademark is a distinctive sign or symbol that identifies the goods or services of a business. Registering a trademark with the Trademark Registry in Nigeria provides legal protection against unauthorised use and commercialisation of brand identity.

(II) Patent Registration: If the family business develops a new invention or process, it may be eligible for patent protection. A patent gives the business exclusive rights to use, manufacture, and sell the invention for a specified period.

(III) Copyright Registration: Copyright protects original works of authorship, such as literature, musical, dramatic and artistic works. Registering copyrights ensures that the business has evidence of ownership in connection to exclusive rights to use, commercially exploit, and distribute its creative works.

(IV) Digital Assets Protection: Digital assets owned by family businesses in Nigeria can be protected by adhering to the Securities and Exchange Commission (SEC) Regulation Rules on Issuance, Offering Platform, and Custody of Digital Assets. The Regulation establishes SEC-registered platforms, and outlines the stringent security and operational standards required from SEC-licensed custodians, who are mandated to implement security measures such as encryption and multi-factor authentication for proper storage of digital assets while mandating issuers to provide accurate information about the digital assets offerings, risks attached to the digital assets, rights, and obligations of subscribers, which in turn enables potential and existing digital asset owners make informed decisions. The Regulation further mandates digital asset owners, who may be corporate entities like family businesses to adhere to Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) regulations to prevent legal and financial risks.

(V)Trade Secrets: Trade secret guarantees protection for product designs, manufacturing techniques, new marketing strategies and any competitive information that the family business can benefit from commercially. It is usually protected by contracts

6. Conclusion

Establishing a family business in Nigeria requires a thorough understanding of the legal framework that governs business formation, operation, and succession. Choosing the right business structure that aligns with the collective family goals and nature of business, complying with regulatory requirements, implementing effective governance, and protecting intellectual property, are essential for the family businesses to thrive and contribute to Nigeria’s economic growth. Additionally, having mechanisms in place for dispute resolution and succession planning ensures the long-term sustainability of the family business whilst upskilling the NextGen is fundamental to professionalise these organisations.

As we celebrate black owned business this month, we hope that families are inspired to set up and operate businesses in Nigeria. We are open to receiving your enquiries and rendering legal advisory and consulting services to family members aspiring to set up businesses in Nigeria. We are available to receive your comments, enquiries and clarifications on info@aeolawpractice.com.

Adeola Osifeko is the Founding Partner of AEO Law Practice and can be reached by email.