“It all depends on the goal of what you’re creating,” explained Tosin Amusan, Product Development Lead at Mylaw.ng when asked about the proper way to register startups in Africa.
“A business is like a house. When you decide to build a house [you build your foundation based on] where you want it to go. In the same way, your business structure should be determined by where you see yourself going. So if it’s a small business, which is just a side-hustle then you have a business name. But, if you see yourself having investors, having a board, going international, then you are a company….if you are not doing it for a profit, you are looking at an NGO.“
While some startups might not see registering their company properly as a big deal, not doing so can lead to costly consequences.
“If you decide to create a startup and something goes wrong, they [could] come for your assets,” Amusan explained at the Africa Tech Summit’s session on managing legal risk and navigating the regulatory landscape.
Let’s say a founder borrowed money from a bank to bootstrap their startup without registering as a limited liability company (LLC). If the founder defaulted on this loan, he/she could have their personal assets seized.
Registering a startup as an LLC adds a layer of protection by limiting the amount of money lost in the event of a default to a certain amount ( usually equivalent to the amount of money one has invested) and restricts your assets from any claims.
How your startup is registered can also be a determining factor in attracting investors and grant funding.
A startup that sees itself seeking out investors, establishing a board of directors or going international would register as a company with the goal of attracting investment to fund their endeavors. A startup that wants to operate as a nonprofit and apply for grant funding might register as a non-governmental organization (NGO).
“ With all the excitement of starting a business people don’t realize and then they have to go back and learn from the mistakes they have made or pass on opportunities because they have the wrong corporate structure,” said Amusan. “so basically think ahead, write it down…and talk to a lawyer!”