Choosing the Right Legal Entity: a Guide for New Business Owners in Kenya

Published by Raymond

May 1, 2023

Congratulations on developing a business idea, researching its viability, creating a business plan, and preparing your finances. Now it’s time to be choosing the right legal entity to establish your business officially.

Your legal structure will have critical implications on the payment of taxes, the level of control, liability, and ongoing administration.

Fortunately, there are several options for a new business, whether it’s a one-person operation or an endeavour with multiple capital-injecting participants. This article will delve into the different legal entities’ attributes to help you find the proper structure for your business.

Here are the legal entities to consider:

1. Sole Proprietorship

  • The simplest legal entity to start a business with
  • Best suited for an individual new to the business, has limited capital, or wants to retain total business control.
  • To set up, register your business name in Kenya
  • Your assets can be seized to settle debts or legal claims incurred while running the business.
  • Tax obligations are assessed the same way as for an individual taxpayer using PAYE tax bands.
  • A sole proprietorship can easily be converted to a different entity, such as a partnership or a company when the business needs to change.

2. Partnership

  • A simple entity for two or more people to own a business together
  • There’s no distinction between the partnership and the owners
  • The personal property of each partner can be seized to settle any debts or legal claims incurred while running the business
  • Each partner is an agent of the other partners, and every transaction entered is binding on all partners and the partnership
  • Partners pay taxes on their income individually, as the partnership doesn’t pay taxes
  • The process of setting up a partnership is similar to that of a sole proprietorship
  • Partners should have a partnership deed setting out how the business will run and the rights and duties of each partner.

3. Limited Liability Partnership (LLP)

  • Combines elements of a company with those of a partnership
  • Upon registration, an LLP becomes a body corporate with perpetual succession and a legal personality separate from its partners
  • Partners’ liability is limited to their capital contribution, and personal liability doesn’t extend to other partners for acts of negligence and fraud committed by a partner
  • LLPs must have at least two partners, and there is no limit to the maximum number of partners. Partners can be natural persons or legal entities such as companies, but all LLPs must have a manager who is a natural person
  • LLPs are not subject to corporation tax, and partners pay tax on their income after profits have been distributed
  • To register an LLP, you need at least Kshs.25,200 and to complete a form with the particulars of the LLP, the partners, and the manager
  • LLPs have fewer reporting and compliance requirements compared to companies
  • LLPs are ideal for professional businesses such as accounting or legal practices where partners wish to enjoy limited liability
  • It’s good practice for partners to prepare a partnership deed setting out how the LLP is to be run and the rights and duties of each partner
  • Partnerships and private companies can be converted to LLPs, but LLPs cannot be converted to a company.

4. Companies

Types of Companies:

  • Private Companies – have a minimum of 1 director and one shareholder and restrict the transfer of shares to outsiders. They are suitable for single-member businesses or businesses with multiple shareholders who want limited liability.
  • Public Companies – have a minimum of 2 directors and seven shareholders and allow the transfer of shares to anyone, including non-members.
  • Companies Limited by Guarantee – limit members’ liability to the amount they have committed to contribute to the company’s assets in case of liquidation. They are suitable for charitable organisations.
  • Foreign Companies – can register as a branch or subsidiary; the latter is subject to compliance requirements similar to local companies.
  • Companies must keep proper books of account, file annual returns, and pay corporate tax at 30%. In addition, profit-making companies that pay dividends to shareholders are subject to withholding tax.

5. Cooperative Societies

Cooperative societies are formed to improve people’s welfare and economic well-being in a particular class or industry. They are corporate bodies separate from their members and must have a minimum of 10 members. Cooperative societies must keep proper books of account and hold annual general meetings for their members. They are also required to have a committee responsible for managing their affairs.

6. Societies

Societies are associations of 10 or more persons established in Kenya or having their principal place of business in Kenya. They are used for education and training associations, sporting activities, and religious and charitable organisations. Societies must have a constitution/rules, keep updated account records, hold annual general meetings, and file annual returns with the Registrar.

7. Self-help Groups (SHG)

Self-help groups, commonly known as chamas, have become a popular option for investment and running a business. SHGs were initially used for small-scale investments and household needs, such as school fees. However, they have become entities where individuals can collectively own property and make large-scale investments.

Here are some requirements to keep in mind when considering registering an SHG:

Membership: A SHG should have at least ten members to be eligible for registration.

Set-up and management: To register an SHG, members must complete an application form and attach the group’s by-laws, minutes of electing officials, and a list of members. The documents are then presented to the nearest DC office for registration with a fee of Kshs.1,000.

Compliance: The SHG is required to file Annual Returns with the Registrar at the DC office and hold an annual general meeting. If there are any changes in membership, officials, constitution, etc., the officials must notify the Registrar within 14 days of the change.

Registration of an SHG gives it formality and clarity regarding member obligations, leadership, and property holding. Upon registration, the SHG can also apply for project loans or assistance through the Ministry of Social Development.

In conclusion, SHGs offer a more straightforward and less costly registration process than other entities. As a result, they have become formidable entities for investment and running businesses, and their registration provides clarity and formality for members.

Choosing the proper business structure is a critical decision for any entrepreneur. By selecting the best legal entity for your business, you can optimise your tax obligations, ensure limited liability, and make raising or reducing capital easier when necessary.

If you have any questions or need further clarification about the proper business structure in Kenya, please don’t hesitate to get in touch with our Online Business Lawyers via rna@raynessanalytica.com

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