Under the Companies Act of 2015 of Kenya, there are four primary business structures: sole proprietorship, partnership, limited liability partnership, and companies (Private: Companies limited by shares and Companies limited by guarantee & Public Companies).
1. Sole Proprietorships: Sole proprietorships are the most common and involve minimal formality. However, the proprietor’s liability is personal and unlimited.
2. General Partnerships: When two or more individuals wish to conduct business together, they may form a partnership. While subject to more regulation than sole proprietorships, partnerships have less regulation compared to limited liability partnerships and companies. The liability of partners is personal and unlimited.
3. Limited Liability Partnerships (LLP’s): Designed for large professional firms, LLPs closely resemble companies in many aspects.
4. Private Limited Companies by shares: A type of company, usually small, that does not issue shares to the public. The company’s name is usually followed by ‘Ltd’, short for ‘Limited’.
5. Public Limited Companies: A public company is that which allow its members the right to transfer their shares in the company and allows invitations to the public to subscribe for shares or debentures of the company.
Choosing a Business Structure: Entrepreneurs must select from these structures, each offering distinct advantages and disadvantages.
BENEFITS OF A COMPANY
In Kenya, companies register under the Companies Act (No. 17 of 2015),
1. Limited Liability: A company provides limited liability to shareholders, protecting them from the company’s misdeeds and liabilities. In contrast, a sole proprietorship does not offer limited liability, exposing the proprietor to business-related misdeeds and liabilities.
2. Separate Personality: Private companies have separate legal identities and legal rights from their owners. Therefore, a company has the right to own and dispose property, file or defend lawsuits and enter into contracts in its own name.
3. Corporate Governance: Companies can have multiple directors, distributing statutory duties and managing risk through a larger board. Business names, however, lack the flexibility to establish a board, leaving the proprietor solely responsible for liabilities.
BENEFITS OF A SOLE PROPRIETORSHIP
while sole proprietorships register under the Registration of Business Names Act (CAP 499, Laws of Kenya).
1. Flow-through of Income Taxes: The sole proprietor is taxed at a personal level, with business expenses deducted from all income avoiding corporate tax.
2. Fewer Statutory Requirements: Sole proprietorships have fewer annual statutory requirements compared to companies, avoiding complexities such as filing returns, notifying shareholder changes, hiring company secretaries, and meeting audit requirements.
3. Ease of Formation: Registering a sole proprietorship under a business name is a straightforward process, requiring minimal information compared to the complex procedures involved in incorporating a company.
4. Profit Retention: Sole proprietors retain all business profits without the need to share with shareholders in the form of dividends.
5. Simplified Management: Business names operate with simplified management, as there is no board to defer to for decisions. This agility allows faster adaptation to changing business conditions compared to companies.
In summary, the choice between a company and a sole proprietorship depends on factors such as liability considerations, tax implications, regulatory requirements, and the desired level of corporate structure and governance. Each option presents distinct advantages, and businesses should carefully weigh these factors to align with their specific needs and objectives.
BENEFITS OF GENERAL PARTNERSHIPS
A General Partnership (GP) is an agreement between partners to establish and run a business together. It is one of the most common legal entities to form a business. All partners in a general partnership are responsible for the business and are subject to unlimited liability for business debts.
Understanding the concept of general partnership can help you gather enough knowledge on how individuals and businesses form partnerships.
1. Easy Business Formation: General partnerships require very little paperwork. Usually, general partnerships must abide by fewer regulations and are under less government supervision than companies.
2. Simple Operating Structure: Each partner should have a clearly defined role and business decisions should be handled accordingly. Unless the partnership agreement states otherwise, all partners have equal voting rights within the group regardless of how much capital they contributed to the venture. Partners have a financial duty to one another, and are expected to act in the best interests of the partnership as a whole rather than just for their personal benefit.
3. Pass Through Profits and Taxation: Because individuals form partnerships, they are taxed just like a sole proprietorship. Each partner must include his/her business income on her personal tax return and he/she can deduct business losses on her individual tax return as well.
4. Ease of Dissolution: A partnership can be dissolved at any time and partners have full liability for their business. In Kenya, upon the death or withdrawal of one partner, the entire partnership dissolves.
BENEFITS OF LIMITED LIABILITY PARTNERSHIPS (LLPs)
Due to the inherent disadvantages associated with general partnerships, the primary one being the unlimited liability of partners, a limited liability partnership came in to solve this issue. An LLP is a corporate entity registered under the Limited Liability Partnerships Act of 2011 (LLP Act) that integrates the organizational flexibility of a partnership with the limited liability status attributable to a company.
Like a Company described above, an LLP is separate legal entity that is distinct from its partners. It can sue or be sued in its name, and it can own property. Therefore, the LLP is responsible for its own liabilities.
1. Limitation of the liability of partners: Liability is limited only to the extent of partner’s contribution. Their personal assets are protected.
2. Management of the partnerships: There is a flexibility aspect towards management of an LLP in that, Partners can decide to have one partner manage all the affairs of the LLP, while the other partners act as financiers, or they could have all the partners actively involved in the management of the LLP. The registered agreement sets out the rights and responsibilities of each partner, as will be agreed upon.
3. No double taxation: Partners only pay their individual taxes depending on their income from the Partnership. This helps increase profits and reduce on expenditures incurred.
