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Sole Proprietorship Business in Kenya

This article is provided by Mohamed Madhani & Co 


What is a sole proprietorship?

 A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business.

 It does not involve many of the complex filing requirements associated with other types of business structures such as corporations.

 Sole proprietorships allow persons to report business income and expenses on their individual tax returns. Because you and your business are one and the same, the business itself is not taxed separately- the sole proprietorship income is your income.

 The owner receives all profits (subject to taxation) and has unlimited responsibility for all losses and debts. Every asset of the business is owned by the proprietor and all debts of the business are the proprietor's.

 Why start a sole proprietor business?

 

 In Kenya, every entrepreneur is required by law to register the business name which will be used to carry out business activities.

 Who can start a sole proprietor business?

 

 Any individual can start this kind of business. In this regards, both a Kenyan Citizen and a foreigner can start a sole proprietorship.

 How can one start a sole proprietor business?

 In order to register a sole proprietorship business, an entrepreneur needs to meet the following requirements;

 

  • Name of business – Firstly, a name search needs to be performed at the Companies Registry to ascertain the availability of the name. The proprietorship can be named after the owner, or a fictitious name such as Nancy's Nail Salon can be used to enhance the business’ marketing. This however does not create a legal entity separate from the sole proprietor owner.

 

  • Nature of business – You will need to come up with one specific nature of business. For example: Machinery, Computer Repairs and Mobile Phone & Accessories. General words such as “retail” “wholesale” “trade” and “General Supplies” will not be approved as they are not sufficient for the Company Registry to proceed to register your business.

 

  • Address of the principal place of business i.e. (Plot No., section and name of street or road, and name of building) – The Plot number can be found on the electricity bill or water bill of your business premises. If you do not have a business premises, you can use your home residential plot number/land reference number for registration but you will ultimately need to update the records at Company Registry once you have a Business Premises.

 

  • Postal address – If you do not have a postal address for your business, you can register one for Kshs. 4,000/= at the nearest Postal Office, otherwise you may us your personal postal address. If you do not have, ask a family or friend to allow you to use their postal address for purposes of the application and after apply your own and then update at Companies Registry.

 

  • Address of any other place of business – This is only applicable to businesses that are currently operating business in other counties or have other branches under the same business name. 

 

  • Full names of you and any other partners – Any person who has changed his name must give all former names, unless the change occurred before the applicant attained the age of two years. Only one person is required for a sole proprietorship business. A partnership business requires a minimum of 2 people and maximum of 20 people.

 

  • Nationality – You will require disclosing your nationality as indicated on your identification e.g. Kenyan, British, German, Chinese, etc.

 

  • Age – Make sure you give your correct age based on your National ID or passport.

 

  • Gender – You have to indicate whether you are male or female.

 

  • Usual place of residence –This is where you currently reside e.g. Nairobi, Kisumu, Arusha, Kampala etc.

 

  • Other business occupation – You will need to enter your occupation e.g. Mechanic, Accountant, etc. If you don’t have a specific occupation, you can simply indicate businessman or businesswoman.

 

  • Signature – As with any formal application, you will be required to append your signature at the end of your application.

 

  • Identification documents- you will be required to provide a copy of your ID/Passport, PIN Certificate and one colored passport photo

 

Timelines for registration

 It usually takes between one to three weeks to finalize registration formalities of a business name. A Certificate of Registration of a Business Name is issued on finalization of the registration formalities.

What are the Advantages of a sole proprietorship business?

  • Ease of formation- Starting a sole proprietorship is much less complicated than starting a formal corporation, and also much cheaper.

In the formation of a company, there is usually a substantial amount of start-up costs that must be incurred by the promoters of the company in incorporating the company. These preliminary expenses include the fees paid to government such as the registration and stamp duty fees. By contrast, a sole trader has little, if any, start up cost since there are no incorporation documents that needs to be prepared.

  • Tax benefits - The owner of a sole proprietorship is not required to file a separate business tax report. Instead, they will list business information and figures within their individual tax return. This can save additional costs on accounting and tax filing. The business will be taxed at the rates applied to personal income, not corporate tax rates.

 

  • Decision making- With regard to decision making, a sole proprietor is his own boss and need not consult when taking any business decisions. For this reason, business decisions can be made quicker whenever it is necessary. The owner can also fully transfer the sole proprietorship at any time as they deem necessary. This is unlike in a company where the day to day decisions are entrusted to the Board of Directors of the company. Major decisions like change of name and appointments of directors rest on the shareholders of the company at general meetings. Due to the need for consultation, decision making process in a company is much slower compared to a sole trader situation.

 

Are there Disadvantages of Sole Proprietorships?

 Yes. Where there are pros, there are cons.

Forming a sole proprietorship does involve some risks, mainly to the owner of the business, as legally speaking they are not treated separately from the business.

Some disadvantages of sole proprietorships are:

  • Liability- A Company, whether private or public, has a legal personality of its own. This legal attribute makes a company distinct in every aspect from its members. For this reason, a company has the legal capacity to trade, borrow, lend, sue and be sued in its own name.

On the other hand, a sole proprietorship as a form of business entity is unincorporated entity and has no legal personality of its own. In light of this, there is no separation in law between the sole trader himself and his business. By extension, the assets and liabilities of the business and those of the individual sole trader are the same. The business owner will be held directly responsible for any losses, debts, or violations coming from the business. For example, the owner could be sued for any unlawful acts committed by the employees. This is drastically different from corporations, wherein the members enjoy limited liability (i.e. they cannot be held liable for company losses).

 

  • Lack of continuity- The life of a sole proprietorship business is dependent on the life and fortunes of the owner. The business does not continue if the owner becomes deceased or incapacitated, since they are treated as one and the same. Therefore, in most cases, the death of a sole trader will mean the end of his business. The business is liquidated and becomes part of the owner’s personal estate, to be distributed to beneficiaries.

On the other hand, the existence and business of the company is not affected by death of any of its members. However, this will usually be the case for large public companies and would not apply in a small private company whose existence and business is largely dependent on the goodwill and individual expertise of its main shareholders-who usually also serve as the directors of the company. 

 

  • Difficulty in raising capital - Since the initial funds are usually provided by the owner, it can be difficult to generate capital. Sole proprietorships do not issue stocks or other money-generating investments like corporations do. The sole trader’s main sources of funds for the business are usually personal savings, trade credits and donations from friends.

Both private and public companies are viewed by lenders as more stable customers to lend compared to the sole traders.

 

  • Decision Making- The lack of consultation by a sole trader in the decision making process may precipitate strategically poor and unwise business decisions. This is unlike in a company situation where any decision, either at the Board level or at the general meeting level, is a result of deliberation and reconciliation of rival business ideas.

 

  • Taxation- Under the provisions of the Income Tax Act, Cap 470, Laws of Kenya, companies are allowed to expense the management fees and salaries paid to their management team when computing the company’s taxable profits. This however does not apply to a sole trader who is not allowed to deduct his salary from the taxable income of the business and is taxed for both his personal and business.

With regards to the rate of taxation, a company is taxed at a fixed rate of 30% on its taxable income or 37.5% for a foreign branch. This is not to mention some tax holidays and lower rates of taxation that are enjoyed by the companies registered to operate in the Export Processing Zones and those that have agreed to list in the stock exchange.                           (See below 1) Conversely, a sole trader is not accorded any tax holidays or lower rates of taxation. If anything, a sole trader is subjected to income tax at graduated rates of taxation (see table 2). 

 

Table 1

 

No.

Item

Rate of Income Taxation

1.

Resident Company

30%

2.

Unincorporated Entity with a turnover of up to Kshs. 5M – On gross receipts

30%

3.

Non-resident company operating as a branch under Certificate of Compliance

37.5%

4.

Export Processing Zones Enterprises (under Certificate of Compliance for the first 10 years)

 

Nil

5.

Export Processing Zones Enterprises (under Certificate of Compliance for the next 10 years)

 

25%

6.

Newly listed companies following year of listing (List at least 20% of its shares)

 

27% for 3 years

7.

Newly listed companies following year of listing (List at least 30% of its shares)

 

25% for 5 years

8.

Newly listed companies following year of listing (List at least 40% of its shares)

 

20% for 5 years

 

Table 2

 

No.

Gross Income

Rate of Income Taxation

1.

On the first Kshs,121,986/=

10%

2.

On the next Kshs. 114,912/=

15%

3.

On the next Kshs. 114,912/=

20%

4.

On the next Kshs. 114,912/=

25%

5.

On all income over Kshs. 466,704/=

30%

   Parting Shot!

 Prior to making up your mind on the nature of structure of your business, it is wise to speak to your lawyer on the legal implications of the various business structures and tax advice from your tax specialist to ensure that you have the best structure for your business.

 

Copyright © 2016 Mohamed Madhani & Co . All Rights Reserved.

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