The Nigerian business landscape is arguably the most active, robust, and commercially engaging in Africa. With an estimated population of over 200 million people, 371 ethnic groups, traversing an area of 923,769 square kilometres, it is regarded as the most populous black nation on earth. Aside her numerical strength, Nigeria remains a potentially economic powerhouse in Africa despite the centrifugal forces militating against her full blossom. Interestingly, the business landscape of the country from the north to the south though, inundated with a myriad of challenges (power outage, transportation, access to credit, registration, taxation, regulation, security, culture and bias), remains undaunting.
Furthermore, encumbered with tons of issues cum the inability of the government at both the states and the federal levels to fully provide employment, a lot of individuals or groups are forced to set-up their own businesses rather than have their arms akimbo waiting for manna to fall. Hence, the Nigerian landscape is littered with businesses. As a matter of fact, most individuals in the country brandish themselves as business owners. Often, you will find their profile read thus – ‘importer, exporter, contractor & general merchants’. As much as these strides are commendable in the face of daunting challenges, there is a structural lacuna which has eaten deep into the fabric of businesses in the country. This, I intend to put my searchlight on in this article.
The Companies and Allied Matters Act (CAMA, 2020) provides the legal framework for setting up businesses in the country. With the passing into law of the reformed Company and Allied Matters Act (CAMA, 2020) which replaces the CAMA 1990 Act, Nigeria is uniquely positioned to be in the top 20 ease of doing business rating globally by 2030. The introduction of long-awaited changes and innovations in the Nigerian company law, which invariably has expanded the circumference of business structures, points to an avalanche of new businesses in the horizon. The most common business structure in the country is the sole proprietorship which requires just one person to start. Hitherto, a minimum of two persons were required to form a limited liability company; the change in the new Act has reduced this to just one person. This simply connotes that business owners who currently trade as sole proprietors can register a company without the need to bring in new owners/directors at the initial stage and continue to run their business as before but with added benefits of limited liability and access to credit. As much as this change is remarkable, there is a drawback I have observed with company owners, much less the sole proprietor banking to gravitate to a company by reason of the introduced change in the new Act.
Having worked as an accountant for some years, plying my trade with a couple of limited liability companies owned by Nigerians, there is a recurring decimal I find disturbing. In case you wonder what – it is the apparent non-committal stance to the concept of separate entity. The definition of a separate entity is easy to figure out, but, as they say, the devil is in the details. A separate entity is a business that is separate legally and financially from its owner(s).
Consequently, there are two sides to the coin – the legal and the financial (accounting) parts. The legal component of the concept connotes that upon incorporation, a company is regarded as a ‘person’ distinct from the people behind its setting up. In order words, a company can ‘sue’ and be ‘sued’ in her own name and the liability of the company is separate from that of the owner(s). The accounting component of the separate entity concept states that we should always separately record the transactions of a business and its owners. This concept is very important because if transactions of a business are mixed up with that of its owners or other businesses, the accounting information in the financial statement will not present a true and fair view of the performance and position of the business entity. The separate entity concept of accounting is applicable to all types of business organizations (i.e., sole proprietorship, partnership, and company) even if the law does not recognize a business and its owner as separate entities. However, in this piece, my focus is on the limited liability companies.
As I had earlier opined, there is a drawback I have noticed with a lot of the companies in Nigeria where I have worked or had dealings. Though registered as a limited liability company in consonant with the extant CAC Act, I find it very disturbing to notice that no recourse is paid to this concept of separate entity out of sheer negligence or complete apathy. Even with my intervention and education on the necessity of the concept in the course of my work as an accountant, I find it a daunting task explaining it to business owners to embrace and imbibe. More troubling is the supposedly highly educated and exposed business owners who are expected to know better yet fall short of this same dilemma. Consequently, it has resulted in a case of Siamese twins where the business owner is no different from the business in terms of accounting for personal fund and the business resources. This, in the long run, engenders a skewed financial report as funds would have been comingled. Imagine the following instances, where:
- An owner removes funds from a company without recording it as either a loan, compensation or an equity distribution.
- An owner extends funds to a company without recording it as either a loan or a stock purchase. Thereby, undocumented cash appears in the business.
- An owner made an arbitrary personal expense from the company resources without having it recorded as an advance to him/her.
As reeled out, these instances abound but are not limited to the above. Hence, the accounting component of the concept becomes very glaring. As a matter of fact, the concept is pivotal to creating a good accounting system and audit in any company. So, the question is – how do I keep my company entity separate? Consider the following:
- Separate a company bank account from a personal bank account
- Institute an accounting system to capture all business transactional details
- Employer should submit himself/herself to the system instituted
- Employ a professional accountant to capture, analyse and record all transactions appropriately
The above measures if meticulously adhered to may jolly well set the company on the path of entrenching the concept in her system. Beyond this, the separate entity concept of accounting is of great importance for the following reasons:
- The separate entity concept is essential to separately measure the performance of a particular business in terms of profitability and cash flows etc.
- It helps in assessing the financial position of each business separately on a particular date.
- It becomes difficult and impossible to audit the records of a business if they are intermingled with those of different entities/individuals.
- The concept ensures that each business entity is taxed separately.
- The employment of separate entity concept is very general among business organizations. If a company ignores this concept, it would not be able to compare its financial performance with that of others in the industry.
In conclusion, as much as this subject appears trivial, the import of the concept to the overall well-being of the company begs for deeper consideration.
Damilola Okunola is a professional accountant with vast experience in providing accountancy services to companies in Nigeria. You can engage him via email@example.com.