Market Update: Five real costs of formalising your small business in Nigeria – Full Analysis

Many people who run businesses in Nigeria are not officially registered.

According to World Economics, the informal sector accounts for about 57 percent of the country’s total economic activity and employs more than 80 percent of workers.

However, because many of these businesses are not formally registered or taxed, they contribute very little to government revenue. As a result, Nigeria’s tax-to-GDP ratio is about 13.5 percent, one of the lowest in the world.

For policymakers, the solution is quite straightforward: to widen the tax net and formalise more businesses.

For entrepreneurs, the calculation is more complex. Beyond the headline registration fee, formalisation introduces financial, administrative and structural costs that many small business owners only fully understand after they begin the process.

Here are five real costs of moving from informal to formal in Nigeria, according to Sophie Ejiro, a small business owner who got her business formalised.

Read also: Five tax rules shaping 2026 business filings

Registration and documentation

On paper, starting a business in Nigeria looks cheap. The Corporate Affairs Commission (CAC) charges N500–N1,000 for name reservation and N10,000 to incorporate a small private company with a share capital of N1 million or less.

Stamp duty is 0.75 percent of authorised share capital, payable via the Federal Inland Revenue Service (FIRS).
But official fees rarely tell the full story.

Once legal support, certified true copies and a company seal are added, total incorporation costs can exceed N70,000. Many founders pay N40,000–N60,000 in professional fees alone.

For a new entrepreneur, that means working capital is diverted before the first sale is made.
Countries like Rwanda have reduced such friction through aggressive reforms. In Nigeria, registration is digital, but still layered.

Business structure determines tax exposure

Formalisation changes your tax identity.

Registering a business name means your profit is treated as personal income and taxed under state income tax rules. Incorporating a limited liability company (LLC), however, subjects the business to the Companies Income Tax (CIT).

Under current thresholds: Small companies (≤ N25m turnover) pay 0 percent
Medium companies (> N25m and < N100m) pay 20 percent
Large companies (≥ N100m) pay 30 percent

Companies may also face VAT obligations, withholding tax and education tax. An LLC makes it easier to raise investment and structure ownership. But it also increases reporting expectations and regulatory scrutiny.

Recurring compliance obligations increase fixed costs
Formalisation introduces recurring obligations.

Employers must register for PAYE and remit employee taxes monthly. In Lagos, this is overseen by the Lagos State Internal Revenue Service (LIRS). Companies must file annual returns with the CAC and maintain structured financial records.

Businesses must also register their premises and pay an annual levy.

Individually, these costs look manageable. Collectively, they increase fixed expenses, costs that must be paid whether sales are strong or weak.
For businesses with thin profit margins, fixed compliance costs can quietly reduce profits because businesses can’t operate casually. Keeping proper books are needed.
That usually means hiring support.

Banking and documentation requirements

One of the incentives for formalisation is improved access to banking and finance. However, opening a corporate bank account requires documentation that some small businesses struggle to provide.

Banks typically require a certificate of incorporation, tax identification number (TIN), proof of business address, such as a utility bill, passport photographs of directors, and formal letters requesting account opening.

These requirements are aligned with regulatory standards set by the Central Bank of Nigeria (CBN) for customer due diligence and anti-money laundering compliance.

Increased regulatory visibility and oversight

Once registered, a business becomes identifiable within multiple regulatory databases. Tax authorities, regulatory agencies and local government bodies can track compliance more easily.

This visibility can be beneficial. Formal businesses are better positioned to bid for contracts, access credit facilities and build long-term brand credibility. They also benefit from limited liability protection under company law.

However, visibility also means exposure to inspections, audits and enforcement actions in cases of non-compliance. For small businesses unfamiliar with regulatory processes, this can create anxiety and uncertainty.

Formalisation remains central to Nigeria’s revenue strategy. Expanding the tax base is critical to funding infrastructure, public services and fiscal sustainability.
But the structure of formalisation matters.

When upfront and recurring compliance costs are high relative to expected profit, micro and small enterprises may delay registration. For low-income earners attempting to transition from subsistence trading to structured entrepreneurship, even the smallest of administrative costs can represent a significant barrier.
The policy challenge is therefore not only enforcement, but calibration, ensuring that compliance frameworks are proportionate to business size and turnover.