Becoming an entrepreneur in Nigeria is an exciting endeavor, with the country’s standing as Africa’s largest economy and rapidly developing startup culture making it a wonderful setting for entrepreneurs as well as investors. With a population of over 200 million, a vibrant population, as well as increasing numbers of an expanding middle class, there exist monumental opportunities.

According to the Global Startup Ecosystem Index 2023, Nigeria has one of Africa’s top three startup ecosystems and Lagos is a leading technological and innovative hub. However, while promising, Nigeria is difficult to do business with—particularly on the legal side. From registration of companies to tax payments, there are many regulations to comply with for startups, and flouting them comes at a costly price.

Studies have revealed that nearly 60% of Nigerian startups fail within their first three years, with legal flaws being a major causative factor. This article highlights the most common legal mistakes Nigerian startups make and provides valuable tips for minimizing risks and maximizing compliance.

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Common Legal Mistakes Startups Make in Nigeria

1. Operating Business Without Business Registration

One of the initial steps in launching a startup is to get registered with the Corporate Affairs Commission (CAC). But most founders delay this, believing they can legalize the company later. This is a risky approach. A business that has not been registered does not have a legal life, and you cannot enforce contracts in court. Disputes with clients or partners can make you legally exposed.

As of 2021, the CAC has registered over 3 million businesses, but most are still informal. Proper registration not only ensures one is in compliance with Nigerian law but also enhances credibility with customers, investors, and partners.

2. Protecting Intellectual Property (IP)

The Nigerian business space is highly competitive, and intellectual property (IP) may be the most important asset of a startup. But most entrepreneurs forget IP protection, leaving their brands, inventions, and original creative works vulnerable to theft or replication.

To protect your business:

• Trademarks protect your brand name, logo, and slogans.
• Patents protect new inventions and innovations.
• Copyrights protect original creative works like music, books, and software.

Early registration of your IP can prevent competitors from stealing your ideas and give you legal recourse in case of infringement.

3. Lack of Tax Compliance

Nigeria’s tax code is complex, and compliance is difficult for most startups. Tax non-compliance can result in hefty fines or, in extreme cases, closure of business. The Federal Inland Revenue Service (FIRS) indicates that thousands of small businesses are fined annually for tax offenses. Startups ought to know about their tax obligations, which may include:

• Corporate Income Tax (CIT) – Paid by registered businesses on their profits.
• Value Added Tax (VAT) – Imposed on goods and services.
• Personal Income Tax (PIT) – Paid on employees’ wages.

To avoid being in trouble, engage a tax advisor or Lawyer at an early point in order to be in line.

4. Violating Employment Laws

The majority of startup business owners are interested in building their service or product rather than the law of hiring labor. However, failure to abide by Nigeria’s Labour Act will lead to suits and penalties.

To keep in compliance:

• Obtain written labour contracts for every employee outlining job, rights, and duties.
• statutory obligations like pension fund payment, health scheme, and standards of occupational health.
• termination procedure to avoid wrongful dismissal.

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5. Operating without requisite permits and licenses

Various sectors in Nigeria have particular permits and licenses under which they are allowed to operate legitimately. Doing business without them can lead to fines or closure. For example:

• Fintech firms require the Central Bank of Nigeria’s (CBN) licensing.
• businesses could demand environmental licenses from the Federal Ministry of Environment.
• Healthcare business requires NAFDAC’s approval.

Before launch, research the licenses that apply to your industry and obtain them to avoid compliance issues.

6. Poor Equity and Ownership Management

Startups tend to overlook proper equity distribution among founders, which can lead to serious conflicts. Lack of a clear founders’ agreement can result in conflicts that weaken the company.

To avoid this:

• Develop a founders’ agreement that covers equity distribution, decision-making processes, and exit processes.
• Clarify the roles and duties of founders to prevent conflicts.

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7. Disregard for Data Protection Laws

With increased e-transactions, data privacy is a significant legal concern. The Data Protection Regulation (NDPR) in Nigeria demands that companies that collect personal data must comply with very tough privacy rules.

Startups must:

• Obtain consent from users before collecting data.
• Print security measures on customer details.
• Carry a privacy policy compliant with NDPR requirements.

Non-compliance may lead to severe penalties and reputational loss.

8. Failure to Do Due Diligence in Partnerships

Most startups rush into partnerships without fully vetting prospective partners. This could lead to legal disputes, loss of money, or business collapse.

To protect your startup:

• Take a look at the legal status, financial situation, and business history of the partner.
• Get into a partnership agreement that details roles, profits, and terms of exit.
• Solicit the advice of a lawyer before signing into any long-term business agreement.

9. Without Corporate Governance

Startups at early stages tend to work informally, with founders taking decisions ad hoc. But weak governance can result in financial mismanagement and legal conflicts.

To establish a good foundation:

• Conduct frequent board meetings and make important decisions in writing.
• Maintain proper books of account to ensure transparency.
• Define the roles and responsibilities of directors and stakeholders.

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How to Avoid Legal Risks in Your Startup

1. Engage a Lawyer Early

Legal advice is sometimes considered a luxury item, but hiring legal professionals from the beginning will pay off in the long term. Legal professionals can help you with business registration, contract agreements, taxes, and regulatory body compliance.

2. Use Legally Binding Contracts

Business relationships are all about contracts, yet most startups enter into agreements over the phone or use poorly written contracts. Ensure that agreements:

• Clearly outline payment procedures, responsibilities, and conflict resolution procedures.
• Are tailored to your business requirements and are not fill-in-the-blank templates.

3. Perform Regular Legal Audits

Your business will grow, and so will its legal needs. Regular legal audits allow you to keep up with new laws and spot potential risks before they become unmanageable. What to audit:

• Corporate governance and compliance.
• Employee contracts and labour law compliance.
• Intellectual property protection.

 

Nigeria is a great business opportunity, but understanding the legal framework is key to success. Startups don’t fail because they are not innovative, but because they lack critical legal fundamentals.

By making sure that you have proper registration, tax compliance, IP protection, and solid contracts, you can protect your business from expensive legal pitfalls. Spending money on legal expertise up front will save you from costly mistakes and set your startup up for long-term success.