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Adhering to regulatory requirements is crucial for startups in Nigeria to thrive and avoid penalties. The Nigerian Startup Act of 2022 requires particular attention.
Non-compliance can lead to potential risks and legal complications, which can hinder the long-term success of startups.
Understanding and complying with relevant laws and regulations is essential for startups to establish a strong foundation in Nigeria's business landscape.
In recent years, Nigeria has established itself as a hub for startups that have grown significantly. However, despite this increase in growth, only a few have remained in operations and sustained business success. When Startups fail, they do so due to a lack of proper planning, funding or compliance to statutory regulations and requirements.
Nothwithstanding, Startups in Nigeria have received significant funding over the years, especially in the Tech sector.with Flutterwave's Series D round of USD250 million raised in February 2022, Moove's USD135 million, and ZirooPay's USD11 million, making some of the biggest waves.
While the increasing attention of the Nigerian government to sustain the consistent growth of startups is important to strengthen the economy, it is also critical for these startups to maintain compliance with statutory requirements.
Startups are young organisations – typically in the early stages of their growth. They are set up to develop a unique product or service, gain market entry and make it irresistible and irreplaceable to customers. Many of these entrepreneurial initiatives are set up by founders focusing on capitalising on perceived market demand by developing a viable service, product or platform.
Startups in Nigeria that want to operate with ease and avoid regulatory penalties must adhere to compliance requirements and ensure they understand the regulations guiding their operation in the country. However, Startups continue to suffer reputational damage due to a failure to understand and comply with government regulations.
Effective compliance is key to any organisation's overall performance. As a result, you must ensure your startup maintains the required compliance levels to avoid severe reputational damage.
In this article, we will explain the most important provisions of The Nigerian Startup Act, 2022, which provides the legal framework for developing and operating startups in Nigeria. We will also highlight some regulatory compliances your startup must comply with to ensure seamless operations.
The Nigeria Startup Act, 2022, which was signed into law by Nigeria’s president on the 19th October, 2022 became the first piece of legislation dedicated to establishing a regulatory framework for startups in Nigeria.
The most important reasons for its creation are:
To provide for the development & growth of tech talent
To position Nigeria's startup ecosystem as the leading technology centre in Africa, having excellent innovators with advanced skills and exportable capacity.
To provide an enabling environment for the establishment, operation and development of startups in Nigeria
Section 50 of the Act defines Startups as;
"A company in existence for not more than 10 years, with its objectives being the creation, innovation, production, development, or adoption of a unique digital technology innovative product, service, or process. "
In addition, it makes a number of provisions. The major ones are;
With the council's approval, the Secretariat will establish a startup support and engagement portal where startups can conduct their registration processes with the relevant government Ministries, Departments & Agencies (MDAs).
The portal will also enable the registration of "labelled-startups" – a startup that the Secretariat issues a certificate after it fulfils labelling requirements – eligible for incentives and benefits under this Act.
The Investment Seed Fund will be managed by the Nigerian Sovereign Investment Authority and is to be used to:
Provide finance for labelled startups
Provide early-stage financing for a labelled startup on the recommendation of the Nigerian Sovereign Investment Authority, subject to the approval of the council
Provide relief to tech labs, accelerators, incubators and hubs.
This scheme will be used to:
As a labelled startup, you have access to grants and other loan facilities administered by the Central Bank of Nigeria (CBN), the Bank of Industry (BOI) & other bodies with authority to financially assist Small, Medium & Micro Enterprises (SMEs).
Your employees are eligible for up to a 2-year personal income tax (PIT) exemption of 35%
The Nigeria Startup Act applies to organisations registered under the Companies and Allied Matters Act (CAMA) 2022, as well as organisations and establishments whose activities have an impact on creating, supportting and incubating labelled startups in Nigeria.
In addition, The Act also provides for the creation of a National Council for Digital Innovation & Entrepreneurship (operating through its Secretariat) to provide overall direction for the harmonisation of laws & regulations that affect a startup and ensure monitoring and evaluation duties to encourage further development of Startups in the country, amongst others.
As mentioned earlier, compliance with statutory regulations and requirements is vital to your operations as a startup. These regulations may include taxes, labour laws, environmental protection, minimum wage, etc. Clearly understanding and adhering to them is essential to avoid costly penalties and legal action.
Below are relevant statutes to consider:
The CAC is the regulatory body responsible for company registrations in Nigeria. The Companies and Allied Matters Act direct all companies in Nigeria to incorporate their business with the CAC before starting operations. In addition, you are also required to file annual returns within eighteen (18) months of incorporating your company in Nigeria and yearly after that.
Your startup must file company income tax within eighteen (18) months of incorporation and subsequently, before the 30th day of June each year. You must also remit the Value Added Tax (VAT) monthly to the Federal Inland Revenue Service.
if your startup has a minimum of 3 employees, you're required by law to deduct and remit a monthly contribution of eight percent (8%) for the employees and ten percent (10%) for you as the employers. This remittance is made into an approved pension fund account.
The Employee Compensation Act, 2010 was established to guarantee and impose obligations to private and public companies employers to remit a minimum monthly contribution of one percent (1%) of the total payroll into the Employees Compensation Fund.
Certain non-financial institutions must register with the Special Control Unit against money laundering, operationally domiciled within the Economic and Financial Crimes Commission (EFCC).
As a startup in Nigeria, it is essential to be aware of the regulatory requirements and comply with them to avoid penalties and ensure a smooth operation.
Below is a checklist of some regulatory authorities and regulations that apply to startups in Nigeria.
The Corporate Affairs Commission (CAC)
CAC requires startups to incorporate in Nigeria before commencing business. Startups must also file their annual returns within 18 months of incorporation and subsequently annually. Not complying attracts a 3,000 or 5,000 Naira fine for every year of non-compliance, based on whether the company is small or large.
The Nigeria Social Insurance Trust Fund (NSITF) and the National Pension Commission (PENCOM)
NSITF and PENCOM require startups to contribute 1% of employees' monthly payroll to NSITF and remit monthly pension contributions upon the employment of 3 or more employees. Furthermore, startups must remit the 1% contribution to NSITF within two years of the commencement of operations and subsequently every year.
Failure to send the statutory contribution to NSITF attracts, at the minimum, a 2% fine of what to remit in addition to the initial amount to pay. In addition, not remitting pension contributions by a startup could result in cautions and monetary fines to imprisonment, depending on the duration of non-compliance.
FIRS and SIRS require startups to file and remit Companies Income Tax (CIT) and Value Added Tax (VAT). Startups must file CIT within 18 months of incorporation and on or before June 30 of subsequent years. They must also remit VAT monthly to the FIRS on or before the 21st day of every month. Not remitting attracts a fine of 25,000 Naira for the first month and 5,000 Naira for each subsequent month. Failure to remit VAT attracts a payment of a fine of 5,000 for every month of default.
The NITDA requires startups that process data of up to 1,000 data subjects within six months to submit to an annual audit and file the report of such audit, amongst other requirements. Startups should file their audit report by March 15 of every year. Failure to comply with this requirement attracts a fine of 2% of the annual gross revenue of the preceding year or a payment of 10 million Naira. Whichever is greater, depending on the number of data subjects dealt with.
The Federal Ministry of Industry, Trade, and Investments require startups to register their intangible assets, including brand names and marks, patents, and copyrights, under the Trademarks Act, Cap T13, Laws of the Federation of Nigeria. Although there is no penalty for non-compliance, startups must protect their trade/brand names and marks by registering them to enjoy a priority status on such marks.
Finally, the Financial Reporting Council of Nigeria requires startups to establish a board of directors consisting of knowledgeable and experienced persons to oversee their affairs and provide advice where necessary. Thus, boosting investor confidence.
In addition to the regulatory requirements highlighted above, startups in specific industries, such as Fintech and Insuretech, require separate licenses and permits to operate successfully.
Obtaining these licenses and permits is essential to avoid penalties and ensure a smooth operation.
When adequately managed, your startup can establish firms roots that drives its purpose and financial promise. However, the consequences of non-compliance with statutory regulations in Nigeria may hinder the operations and growth of your startup.
It is critical to understand these regulations, take necessary steps to ensure compliance and engage the services of a PEO like Workforce Africa to advise on the regulatory requirements of the license you require to operate in Nigeria and any other African country you wish to set up.
When looking to establish a startup in Nigeria, you can avoid compliance issues by partnering with a Nigerian Professional Employment Organisation (PEO) like Workforce Africa.
Workforce Africa will also help you with tax compliance, payroll, benefits administration and other legal and compliance support services.
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