Deciding which business structure suits you best

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Have you decided to start a business? Before you continue with the incorporation process you will be dealt with the task of deciding which business structure would best suit you, and the purposes of the business.

There are five alternative common forms of business structure in the Kenya, which are:

  • Sole Proprietorship (BN2 Registration)
  • Partnership (BN2 Registration) – where the individual works with one or more partners in the business
  • Limited Liability Partnership (LLP)– this provides the partners with the protection of limited liability
  •  Limited Liability Company (LTD)
  • Limited Partnership – this requires at least one partner to have unlimited liability and precludes the limited partners to being involved in the management of the business. This is option is rarely used, as it is not feasible with most current businesses.

When deciding what business structure to choose, you must weigh up what matters most to you and your business. If you make more profits than you need to draw out of your business each year, you will probably want to use a limited company.

If you don’t want your accounts to be made public every year you will want to operate as a sole trader or a conventional partnership.

The price you have to pay for the privilege of trading with the protection of limited liability is registration with the Registrar of Companies and the publication of certain business information and accounts. The protection of limited liability for the members of an LLP is essentially the same as for the directors and shareholders of a limited company.

Thanks to the New Company’s Act, you can establish a limited company solo but there need to be at least two persons to form a Limited liability partnership. However there is nothing to prevent you setting up your own non active company and for the LLP members to simply be you and your company.

If you are thinking of selling your business or think you will require third party investment it may be best to run the business through a limited company as you can sell shares in a company. There are no shares in an LLP.

LTDs are required to hold, record details and maintain minutes of directors, shareholder, and annual meetings. This is not required in an LLP, but there are some annual reporting requirements and a specified format for LLP accounts.

The law imposes restrictions on LTDs as regards to capital maintenance, which causes problems when the owner tries to pay dividends when there are insufficient accumulated profits. There are no equivalent rules for LLPs.

In certain restricted circumstances the members of an LLP can be required to repay drawings and profits back to the LLP after it become insolvent.
Directors of failed companies can be banned from holding subsequent directorships.

Finally, the profits of an LLP are taxed in the same way as for a sole trader, which is why this can be more attractive than operating your business as a limited company.

 

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