As businesses grow and evolve, changes in ownership structure often become necessary, whether to accommodate new investors, transition leadership, or expand operations. However, restructuring a business can be complex, with legal, financial, and operational implications. Many business owners struggle with understanding the right steps to take, potential risks, and how to ensure a smooth transition.
In this edition, we break down key considerations when changing business ownership structures, including legal requirements, financial impact, and best practices for a seamless transition.
- Pre-Change Considerations: What to Know Before Restructuring
Understanding Ownership Structure Changes
Business ownership changes can take various forms, each with its unique implications, such as:
- Sole Proprietorship to Partnership or Corporation: A growing business may require additional expertise or capital, leading a sole proprietor to bring in partners or incorporate the business. For example, a freelance graphic designer may decide to partner with another creative professional to expand service offerings and attract bigger clients.
- Adding or Removing Shareholders: Companies often restructure to include new investors or remove existing shareholders through buyouts. A tech startup, for instance, may bring in venture capitalists in exchange for equity to fund product development.
- Mergers and Acquisitions: Businesses may merge with or acquire other companies to expand market reach and capabilities. A local fintech company merging with a foreign payment processor to enhance international transactions is a good example.
- Family Business Succession Planning: Transitioning leadership to the next generation requires careful planning to ensure business continuity. A retail business owned by a family may involve passing down management responsibilities to children while ensuring governance structures are in place.
Financial Implications
Restructuring ownership has an impact on a business’s financial health, so it’s essential to consider:
- Business Valuation: Understanding how the ownership change affects company value is critical, especially when issuing new shares or acquiring a business. A retail chain seeking new investors must conduct a valuation to determine the fair share price.
- Tax Liabilities and Benefits: Different structures come with different tax implications. A corporation, for instance, may enjoy tax incentives not available to sole proprietors. For example, tech startups registered as corporations may benefit from research and development tax credits from the relevant authorities.
- Funding and Investment Opportunities: Investors and lenders may have different requirements based on the business structure, affecting capital accessibility. A restaurant owner transitioning from sole proprietorship to a corporation may find it easier to secure loans from banks.
- Implementation Stage: Steps to Legally Restructure
Legal and Regulatory Considerations
Changing a business’s ownership structure involves filing with the Corporate Affairs Commission (CAC) and other regulatory bodies, they include:
- Corporate Affairs Commission (CAC) Filings: Businesses in Nigeria, for example, must register structural changes with the CAC. For instance, when a private company goes public, it must update its registration details and comply with additional reporting requirements. Under the Companies and Allied Matters Act 2020, several provisions require companies to update their structure, such as:
- Section 119 (1) which requires Companies to notify the Commission of any changes in beneficial ownership within 7 days.
- Section 176 provides that any transfer of shares must be recorded and reported to the Commission.
- Section 321 provides that Companies must inform the Commission of any new, removed, or changed directors within 14 days.
- Section 41 provides that a company must notify the Commission within 14 days of changing its registered address.
- Section 30 & 46 provides that any changes to a company’s name or Memorandum and Articles of Association (MEMART) must be filed with the Commission.
- Updated Agreements: Partnership deeds, shareholder agreements, and operating agreements should reflect new ownership terms. A small law firm converting from a partnership to a limited liability company will need to update its governing documents.
- Compliance with Tax Authorities: Changes in ownership structure affects tax classification and liability, requiring updates with the Federal Inland Revenue Service (FIRS) and other tax agencies. For example, transitioning from a sole proprietorship to a limited liability company shall require new tax filings and compliance with corporate tax rates.
- Regulatory Approvals: Some industries require approvals from sector regulators before ownership changes can take effect. For example, banks and financial institutions must obtain approval from the Central Bank of Nigeria before undergoing a merger or acquisition.
Operational and Management Adjustments
Ownership changes often result in operational and leadership shifts, requiring:
- Clarified Decision-Making Processes: New shareholders or partners must have clearly defined roles and responsibilities. For example, a software company bringing in investors may need to create a board of directors to oversee major decisions.
- Employee Contracts and Benefits Review: Transitioning from a sole proprietorship to a corporation may affect employee contracts and benefits. For example, a business owner who hires employees after incorporating may need to implement structured salary scales and retirement benefits.
- Cultural and Strategic Alignment: Mergers and acquisitions, in particular, require aligning corporate cultures and business strategies for smooth integration. A logistics company acquiring a smaller competitor may need to unify operational policies and company culture.
Post-Change Compliance & Risks: Avoiding Legal and Financial Pitfalls
Many business owners make mistakes when restructuring, including:
- Failure to Update Legal Documents: Overlooking the need for updated agreements can lead to disputes. For instance, a partnership that expands to include new partners without revising its agreement may face legal battles over decision-making rights.
- Ignoring Tax and Regulatory Compliance: Missing necessary tax or corporate filings can result in penalties. A company that fails to update its tax status after converting to a corporation may face fines from tax authorities. Failure to comply with the provisions of the CAMA 2020 regarding updates to company structure can result in fines, penalties, loss of good standing, or even deregistration by the Commission. Section 177(2) of CAMA 2020 specifically penalizes company directors for failing to register a share transfer, stating that any unregistered transfer shall be deemed not to have been effected, potentially leading to shareholder disputes and operational disruptions.
- Poor Communication with Stakeholders: Employees, investors, and customers should be informed about significant changes to maintain trust and stability. For example, an e-commerce business that merges with another should proactively communicate the change to customers to prevent confusion.
Conclusion
Whether you’re bringing in new investors, transitioning leadership, or merging with another company, navigating ownership structure changes requires careful planning. By addressing legal, financial, and operational considerations, business owners can ensure a successful transition and long-term stability. Consulting legal and financial experts can further streamline the process, mitigating risks and positioning the business for continued growth.
