Various Types Of Business Structures Under Which You May Register Your SME

Registration of a business is the process of making an official record with respect to the name, business operations and other information of the business. Among other benefits, registration helps you create a brand identity and obtain credibility, obtain legal protection of your innovations and separate personal liability from business liability.

Today, there are a number of legal business structures under which you may register your SME. The decision on the type of the legal structure to choose when registering your business is informed by the unique set up of the business including the size of the business, the desired management structure, the extent of liability that the owner wishes to incur and the prospective partnerships or investment opportunities.

Your SME may be registered as one of the below entities:

I. SOLE PROPRIETORSHIP

This is a business entity owned by and run by one individual. There is no separating of the business entity from its owner, or a distinction between the owner’s personal and professional assets and liabilities from those of the business. The owner registers a business name under the Registration of Business Names Act, Cap 499.

Taxation

An owner of a sole proprietorships only files the individual tax returns yearly (before every 30th June) and reports all business income or losses on personal income tax return; the business itself is not taxed separately. The business will therefore be taxed at the rate of personal income instead of as a corporation.

If annual turnover is above Kshs. 5 million, the owner must register the business for VAT with the Kenya Revenue Authority and comply with the VAT Act and its regulations.

Advantages of a sole proprietorship

Quicker to set up & register.

Registration procedure is cost effective.

Minimal formal and legal compliance requirements to operate the business.

Requires a small amount of capital to set up.

All profits go to the owner.

The owner has absolute control of the business operations.

It is simple to change the legal structure later if circumstances change. i.e. It is easy to wind up the Sole Proprietorship and form another business type.

II. PARTNERSHIP

A partnership is a business by two or more individuals who carry on business with a view of making profit. The partners execute a Partnership Deed which is the legal document that spells out the terms and conditions of the partnership and relationship amongst themselves.

The partnership may have to register a business name under the Business Names Act and obtain a certificate of registration if the partners are not using one of their own names for the business.

The liabilities of a partnership are also liabilities to the partners and there is no distinction between the owners and the business entity. However, you can register a Limited Liability Partnership (under the Limited Liability Partnership Act, 2011) to separate the partner’s liability from the partnership.

Taxation

Partnerships do not pay corporation tax. Partnership income is declared through the partnership return and such income is distributed to the individual partners as per the agreed profit sharing ratios. All partners individually account for their taxes arising from their yearly income.

Advantages of forming a Partnership

Broader base of skill, knowledge and experience.

Fewer legal obligations in setting up and operating.

Confidentiality – there is no legal obligation to disclose the affairs or financial position of the business.

Wider capital base as there are more partners (compared to a sole trader).

Easy access to profits.

Business Autonomy – the partners agree on how to run the business.

A partnership is easy to dissolve.

III. COMPANY

A company is a voluntary association of persons, whether individuals, corporates or other associations who have come together for purposes of carrying on business. Incorporation of a company gives the company a legal personality, separate and distinct from the individuals who form it, the directors, members or shareholders. This means that the company owns its assets and is responsible for its own liabilities.

Under the Companies Act, 2015, there are various types of companies, as follows:

a) Company limited by shares

The liability of its members is limited to any amount (if any) unpaid on the shares held by members.

b) Company limited by guarantee

The liability of its members is limited to the amount that members undertake to contribute to the assets of the company in the event of its liquidation.

c) Unlimited Company

This is a company where there is no limit on the liability of its members. This means that should the company fail financially, the shareholders will be called upon to use their own money or property to pay the company's debts.

d) Private Company

This company is held under private ownership and is made up of a maximum of 50 members

The consent of all its existing members is required to add a member.

Its Articles of Association restricts member’s right to transfer shares.

The shares and debentures of the company are not freely offered to the public.

e) Public Company

The Articles of Association allows it members the right to transfer their shares in the company

It does not prohibit any invitation to the public to subscribe for shares or debentures of the company.

For each of the above companies, the Certificate of Incorporation must clearly state the nature of the company.

Taxation of companies in Kenya

Companies resident in Kenya pay Corporate Income Tax at the rate of 30%

Advantages of incorporating a Company

Personal Assets protection through limited liability.

Perpetual life of the company.

Transferability of ownership,

The ability to build credit and raise capital.

A company has capacity to sue and be sued in its own name.

The Company can purchase and hold assets in its own name.

Choosing the right legal structure is a necessary part of starting and running your business. Although you may convert your business from one legal structure to another, it is crucial that you understand your options at the onset which will save your SME a lot of financial constraint related to taxation, statutory compliance and costs for conversion of the business.

At CM SME Club, we have a team of experienced Corporate/ Commercial Advocates with expertise in Business Structuring Advisory. We specialize in reviewing your Business Model and advise on the most suitable legal business structure that you ought to register. In addition, we audit your business documents from time to time and advise you on different areas where statutory compliance is required. Explore our subscription plans and become a member today.

Published on Aug. 22, 2024, 1:10 p.m.