As an entrepreneur, are you operating your enterprise formally or informally? What are the benefits and costs associated with formalizing your enterprise? These are all important questions faced by small business owners, of which a significant number operate informally. By informal economy, we mean a section of the business community that is not monitored, regulated, or taxed by the government.
Developing economies such as Nigeria have a large informal economy. A significant chunk of businesses within the MSME eco-system in Nigeria run as informal structures. To contextualize the depth of informality in the Lagos economy, an NMSME report by the National Bureau of Statistics (NBS) in partnership with the Small & Medium Enterprise Development Agency of Nigeria (SMEDAN) revealed that Lagos State had about 3.39 million informal microenterprises while the number of registered businesses stood at 195, 332 as of 2020. This implies that informal entities in the state are seventeen (17) times more than their formalized counterparts.
We conducted a survey to understand why owners of informal businesses do not want to transition to the formal economy. Our findings identified high registration cost, small turnover position, inadequate knowledge, and perceived lack of government support as reasons small business owners prefer to remain informal.
However, entrepreneurs will be doing themselves a great deal of disservice by not registering their businesses. This is because informal businesses are more vulnerable to shocks, as they have limited or zero access to business opportunities and interventions, thereby undermining their potential to scale and expand.
While there are attendant costs and difficulties in formalizing small businesses, there are significant gains associated with formalization, which you should think of as a business owner.
Access to funding opportunities: Profit-driven financial institutions such as Access Bank and Zenith Bank, as well as social finance institutions such as Lagos State Employment Trust Fund, Bank of Industry and Development Bank of Nigeria, are always less enthusiastic in dealing with unregistered entities, as they are perceived as highly risky for lending. The more formalized your business, in terms of record keeping and registration, the more likely your business will be attractive to lenders. For instance, at LSETF, a certificate of business incorporation (also known as CAC) is a mandatory requirement for accessing the Fund’s loan interventions for SME businesses.
Securing partnerships & investment opportunities: Having a properly registered business makes it easier to attract investors into the business as shareholders (in case of equity) or creditors (in case of debt) as the business expands. As an entrepreneur, you may have a viable business idea but if your enterprise is not formalized, you will find it difficult to convince prospective investors and partners for support.
Promoting growth & sustainability: A company that is a separate legal entity can outlive its founders. One of the advantages of formalization is the continuity it brings to your business. Having a duly registered entity helps to manage opportunities more easily for growth and expansion that may arise in the foreseeable future. It will be difficult to attract top talents if your business is not registered.
Building goodwill and brand reputation: An unregistered entity will struggle to generate goodwill with clients and other stakeholders. For example, if you want to supply goods or services to larger establishments or government MDAs, you need to have a properly registered and compliant company. Registered entities would rather deal with other registered companies. Registering your company will earn your business the respect of other businesses.
Regulatory approvals: Regulatory licensing boards may require your business to be duly registered before you can be issued certain types of licenses (depending on your sector of operations). For instance, for your business to be on the vendor register of Lagos State MDAs, the Public Procurement Act of Lagos State requires parastatals to deal with properly registered companies only.
How do I register my business?
Individuals and businesses can complete the entire process of registering their companies online using the new e-registration portal launched by the Corporate Affairs Commission (CAC).
To be on the safe side, particularly if you are not tech-savvy, you may need to engage a business consultant to walk you through the process.
