The Nigerian Startup Act: What does it mean for your Startup?

November 15, 2022
min read

About 3 weeks ago, Africa's startup ecosystem received the good news: Nigeria's President, Muhammad Buhari, assented to the Nigerian Startup Bill of 2021. Lauded as a game changer which will support the growth of innovation and the digital economy in the country, stakeholders have been mostly excited about the new Act. For instance, Omoruyi Edoigiawerie, the Ecosystem Advisor at the Nigeria Startup Project, described the Act as a "new dawn", since it "decisively addresses a majority of the issues faced by Startups in one legislation". Similarly, Oluwatomi Solanke of Trove Finance opined that the Act will help to "support and sustain high-growth businesses and…accelerate local economic growth".

Here are a few of the reasons why everyone seems to be thrilled about this particular legislation:

1. Under the Act, Startups are given special benefits

From tax reliefs, credit facilities, and export incentives to establishing an investment seed fund for startups, there are several goodies in store for Nigerian startups with the Act.

2. Trainings and capacity building for Startups

The Act establishes a Nigerian Startup Board (NSB) to register and regulate startups. The NSB is then mandated to design and implement training and capacity building programs for start-ups, and strengthen talent development and research within tertiary institutions.

3. Support for Accelerator and Incubator Hubs

The Act further provides for the establishment of accelerator and incubator programmes for startups, and requires the NSB to develop policy to that effect. Also, registered startup accelerators and incubators are entitled to grants and aids for research, development, training and expansion projects.

4. Establishment of clusters, hubs and innovation parks

Under the Startup Act, the Council is obligated to prescribe a framework to establish and guide the operations of startup innovation clusters, hubs, physical and virtual innovation parks in each state of the Federation. With this, startups leaders will be able to network, collate ideas, access professional services and resources, and collaborate.uu

Besides, the enactment of the Act sets Nigeria at par with other countries like Ethiopia, Kenya, Tunisia, and Senegal that have passed startup legislations.

Clearing Cobwebs

Since the bill was passed on October 19, several tech communities have been abuzz with questions about the Act, as incomplete or misunderstood analyses of the Act have floated around. Moreover, as a startup founder, co-founder, or core officer, I can guess that all you really want to know is what the Act means for your startup.

In this section, I would be addressing some of the key concerns about the Startup Act that you probably have, based on questions that have been asked over and again.

Can I apply for the "Startup Label" as a Sole proprietorship or Partnership?

To be able to benefit from all the goodies available in the Act, there is a catch: you must be registered and labelled as a "startup". Now, a lot of the reports I have observed mention that to be eligible for the startup label, you must be a limited liability company (LLC). Well, that's true, as provided in Section 13 (1)(a) of the Act. Nonetheless, you can also apply as a sole proprietorship or partnership [See Section 13 (1)(e)].

Side note: Before even applying for the startup label, the business must be at least co-founded and co-owned by a Nigerian.

How many years must my startup be before I can apply for the label?

Again, commentators have taken different approaches to interpret this. Granted, the Act specifically provides that a startup that is an LLC is only eligible for labeling where it "has been in existence for a period of not more than 10 years from the date of incorporation". That means that the company must be less than 10 years from the date the Corporate Affairs Commission assigned a certificate of incorporation and not the day its operations started. However, no specific date is explicitly provided for sole proprietorships and partnerships. Thus, if you had operated your business as a partnership for 20 years, and then incorporated it as an LLC in its 16th year, the business will still be eligible for the startup label.

The logic behind this time-limit for LLCs is probably that your company – which had a definite object/purpose in its incorporation documents – technically can no longer be considered a startup as it would have gotten to its expansion or growth stage after 10 years. Meanwhile, a sole proprietorship could have been run as a hustle, without any clear pathways to scale – as is often the case in Nigeria.

Must my company be a tech-based company to benefit from the Act?

Well, whether you are a sole proprietorship, partnership or LLC, the purpose of your business must be centred around innovating, developing, producing, improving, or commercializing a digital technology product or process. Or you could also be the holder/repository of a digital technology product or process, or own/author a digital software. As such, you don't necessarily have to be tech-based but tech-enabled. For instance, if you have a ride-hailing business like Bolt that uses its own digital application to facilitate its operations, you will qualify as a startup under the Act.

Is the startup label permanent?

No. 10 years after being labeled as a startup, all that special privilege will expire. Also, there are a number of obligations that you are required to keep under the Act, such as complying with Nigeria's laws and making annual reports. If you default on this and fail to rectify it within 30 days of notice, the label can be withdrawn. Nevertheless, that can be remedied.

What are the financial incentives for startups under the Act?

As a labelled startup, you can get tax reliefs under Pioneer Status Incentive Scheme. Moreover, you are entitled to exemption from all forms of income taxes for 4 years after you are issued the startup label.

Now, if you have 10 employees and above, and 60% of your employees are entry-level without work experience and have recently graduated from school or vocation, you can further enjoy relief from income tax of 5% beyond the general 4 years. Your employees will also benefit from a personal income tax exemption of 35% on their income for two years from the date of engagement.

Apart from tax reliefs, you are also entitled to government grants and credit facilities for entrepreneurs and SMEs.

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