Starting a business isn’t easy, but can be immensely rewarding. Getting started is often the hardest part, but the tips should help getting off the launching pad a little easier. 

Assuming you have already made you decision on why you intend to go into business, having identified a solution to be provided to a segment of a big market (niche), there is need to decide on the legal form of the business.

There are various forms of business structures you can choose from to run your business each subject to different tax obligations, rights and fees.

Is the simplest and cheapest business form that one can begin with, allowing one to trade with their personal name (remember farmers, micro enterprises, estate dukas) or using a trading name. If a trading name is chosen, it must be approved by the Registrar of companies. The registration is effected in one’s name and ID with the business name selected simply referred to as a “Doing Business As,” (DBA).

Some disadvantages of this form include:

1. Total exposure to risks relating to the business. If a ruling is made against the company for cases filed by an injured employee or any other stakeholder, including suppliers, one’s personal assets can be attached/sold for settlement of the debt.
2. High taxes if the business is profitable as the personal tax rates are applied to profits added to other incomes. There is no separate KRA PIN for the business.
3. Business can be lonely.

Applies where a number of legal entities (may be individuals or independent organizations) go into business together (partners are limited to 20 in number) to operate akin to a sole proprietorship to avoid regulations applying to other forms.  All partnerships have to be registered with the Registrar of Companies and the KRA for a PIN Certificate for protection of the partners.  

Currently there are three forms of partnerships in Kenya, a general partnership (GP), a limited partnership (LP) and a limited liability partnership (LLP). Just as in a sole proprietorship, a trading name is optional, with the same approval requirements applying if this is chosen.

A GP does not become a body corporate (legal entity) and a partner is personally liable for the whole amount of any obligation incurred by the partnership while they are a partner. Accordingly, their personal assets could be used to settle business debts if and when it becomes necessary. All partners may participate in the management of the partnership business.

A LP has two types of partners; general and limited partners. The liability of general partners is unlimited, while that of a limited partner is limited to the extent of the amount contributed to the partnership at the time of joining the partnership.

A LLP has to file a Statement of Particulars with the Registrar and is a body corporate (has a separate legal entity personality from its partners). Any change in its partners does not affect its existence, rights or obligations.

Partners are not personally liable, directly or indirectly, for the partnership’s obligations arising in a contract, or other liabilities arising in the course of business, nor for the wrongful act or omission of another partner of the LLP. The liabilities of a LLP are from the property of the LLP and from the personal assets of the partners.

In all limited partnerships, all general partners can participate in the management of the business. However, a limited partner is prohibited. Individual tax rates apply for share of profits.

A LLP is required to have a manager to manage the day-to-day activities of the business and to maintain and use a common business seal to execute all documents that may necessitate legalization.

For all partnerships, a partnership agreement will set the guidelines for the general direction of the administration of the business.

Companies are considered to be separate legal entities from the people behind them. So Directors’ personal assets cannot be attached for encumbrances (unless where a specific asset has been used to guarantee a loan), hence the designation (Limited). They can be Private or Public.

Private Limited Company (PVLC)

A PVLC has to have a maximum of fifty members and Kenyan law now allows for one or more persons (maximum 50) to form one, and unlike in the past, owners do not need to have a Company Secretary. Any sale of shares has to be based on the agreed to Memorandum and Articles of Association.

Public Limited Company (PBLC)

Same structure as a PVLC but where the members are 51+. Shareholding here is available to the public (a member can sell to any interested buyer legally authorized to be a shareholder in the country).

Key disadvantages of a PBLC include a substantial minimum nominal capital requirement and regulatory compliance including the need for a Company Secretary.  It may also be disadvantaged by groups/large shareholders with different aspirations from the other members.

All Limited companies enjoy various advantages which include better capital raising prospects and status in attracting lenders, staff etc.

Disadvantages include higher registration costs and formalities, double taxation as a corporation and for any profits’ distribution (dividends). Limited companies also need to maintain proper accounts which must be audited by independent auditors.

**Any organization recognized as a legal entity can own assets in its own name.

Sam Kagiri (info@benkenya.com)