8 Reasons You Should Register a Company for Your Business
Registering a limited company for your business is a smart move for many reasons. It gives your business greater legitimacy, makes it easier to win bigger business deals, and separates your personal property and finances from the assets of your business.
In this article, we’ll explore why you should run your business as a company and discuss the disadvantages of not doing so. We’ll also give an overview of the process of registering a company in Kenya.
Benefits of Running Your Business as a Limited Company in Kenya
1. Limited Liability – Your Personal Assets Can’t Be Used to Settle Business Debts
Limited liability is a legal concept that protects the personal assets of shareholders or owners of a company from being used to settle the company’s debts or obligations.
If the company faces financial difficulties or legal issues, the personal assets of shareholders, such as their homes or savings, are generally not at risk beyond their initial investment in the company.
2. Separate Legal Entity – The Law Differentiates Between You and Your Business
A limited company is considered a separate legal entity from its owners. This means that the company can enter contracts, own assets, sue, and be sued in its own name, providing a clear distinction between personal and business affairs.
3. Credibility – A Company Appears More Credible Than an Individual
Operating as a limited company can enhance credibility with customers, suppliers, and potential investors.
This is especially beneficial when getting into big business deals.
Consider this: You generate an eTIMS invoice and send it to a client. In one scenario, they see John Otieno and your personal identification number (PIN). In another scenario, they see Craysoft Technologies Limited with a separate Kenya Revenue Authority (KRA) PIN. The second scenario will inspire greater confidence, especially when dealing with people you’re doing business with for the first time.
4. Tax Efficiency – Companies Often Have More Tax Planning Opportunities
Tax planning is ensuring that you’re paying the least amount of tax possible while still being tax-compliant. With professional accounting help, you can take advantage of opportunities such as tax credits and tax deductions to pay as little tax as possible.
With a limited company and professional accountants, you’ll have more tax planning opportunities than with a sole proprietorship.
5. Easier Access to Finance – You Can Sell Shares or Get Loans Easily
Limited companies can raise capital by issuing shares. For example, if you need cash for expansion, you can sell a percentage of the company to an investor. This option is not available to sole proprietors.
Banks and other lending institutions also perceive limited companies as less risky compared to sole proprietorships due to the clear separation of personal and business finance.
6. Enhanced Privacy – Your Personal Details Are More Private
As a sole proprietor, details such as your name, KRA PIN, and contact information are normally shared during business transactions.
With a company, your personal information is shared in a limited way.
7. Brand Protection – Other Businesses Can’t Trade With Your Registered Name
The process of registering a company involves the reservation of a business name. Once the company is registered under a certain name, it’s protected by law and other businesses can’t trade under the same name.
8. Easier Expansion – A Company Facilitates Hiring
As your business grows, you’ll need to hire employees. To legally hire, you must comply with HR statutory regulations such as National Hospital Insurance Fund (NHIF) and Pay As You Earn (PAYE) deductions. You can only do this if you have a limited company that is a separate entity and has a separate bank account.
How to Register a Limited Company: Step-by-Step Process
Thanks to the digitalization of government services in Kenya, company registration can conveniently be done online. All you have to do is access the Business Registration Service. You can upload all required documents online, pay online via Mpesa, and get your company registration certificate online.
1. Name Reservation – Choosing an Available Business Name
You’ll be required to submit three possible names for your company.
Once you submit the names, the business registration service checks whether they have been reserved by other companies. If one of the three options is not in use by any other company, it becomes your company’s registered name.
If all three options are already reserved, you’ll be asked to submit other names.
2. Articles of Association – Choosing the Laws That Will Govern Company Operations
A company’s operations are determined by its articles of association. These articles define the rights and responsibilities of shareholders, the procedures for the appointment and removal of directors, and so on.
You may adopt standard articles of association that apply to all limited companies.
However, it’s always important to consult a legal professional and seek their help in developing articles of association that fit your unique situation. Otherwise, you might end up having problems that could have been avoided at this stage.
At GVL, we have legal experts to provide help with this as part of our business setup service.
3. Nature of Business – State What Type of Business the Company Will Be Involved In
The government requires you to define the type of business your company plans to be involved in at this stage.
An important factor to consider is that businesses grow and change. You might start out in one line of business and find the need to venture elsewhere later on. A legal expert can help you avoid limiting yourself and make it easy for you to expand your business in the future.
4. Target Business Start Date – Define When You’ll Start Operations
This step lets the government know when your company will start running. You’ll also be required to define the end of your accounting period. With this information, the government can track relevant activity, such as the remittance of PAYE tax for your employees.
5. Estimated Annual Turnover – How Much You Expect to Be Making Per Year
This step is significant for tax purposes. If you set your annual estimated turnover at Ksh 5 Million and above, you’ll automatically be obligated to pay Value Added Tax (VAT).
For tax planning purposes, it may be more prudent for you to pay annual Turn-over Tax (TOT). Similarly, it may be unwise to get a VAT obligation before your actual sales cross the Ksh 5 million mark.
The GVL business setup service lets you consult with a professional accountant at this stage to enable your company make smart tax moves as early as possible. A mistake at this stage could affect the profitability of your business in later stages.
6. Number of Employees
You’re required to declare how many employees will be working for the company. You only declare employees who will be earning more than Ksh 13,486 monthly. These are the employees for whom you’re required to make statutory deductions like NSSF contributions.
7. Personal Information of Shareholders and Directors
You should provide relevant personal details of the directors, including:
- Copies of identity cards
- Passport photos
- KRA PIN certificate
Additionally, you’ll need to provide the occupations of the individuals who will be listed as shareholders of the company.
8. Company Details – Physical Location and Email Address
Every company must have a registered physical address. You’re required to provide the following details about your location:
- County
- Sub-county
- Locality
- Street
- Building
You must also submit the official email address of the company.
9. Share Capital – Shareholders and Respective Stake In the Company
You’ll need to declare the share capital of the company (the total capital raised by its shareholders). This figure represents the amount of financial resources available to the company for investment and growth.
You must also define the percentage of the company owned by every shareholder.
The shareholding of the company is governed by the rules you set in the articles of association. Such rules determine:
- The voting rights of shareholders
- The basis for calculating earnings per share
- The company’s ability to raise additional capital through the issuance of new shares
It is advisable to use expert help while establishing the rules surrounding share capital.
Frequently Asked Questions Starting a Company in Kenya
How Much Does It Cost to Open a Company In Kenya?
It costs Ksh 10,650 to open a limited company in Kenya. The amount must be paid online, either through mobile money (M-Pesa) or debit and credit cards.
How Long Does It Take to Register a Company In Kenya?
It takes three to five business days to register a company in Kenya. Most people use up time preparing the required documents. The process can also take longer if the application documents have errors and there are corrections that must be made.
Provided you have all necessary documents filled in correctly, your limited company should be registered within five days.
Can One Person Own a Company in Kenya?
One person can own a company in Kenya. Following an amendment to the Companies Act in 2015, an individual can be the sole director of a company in Kenya, with sole decision-making authority.
GVL Solutions provides company registration services. Your application will be handled by a lawyer. You’ll also consult with a professional accountant who’ll advise on the best way to structure your business for tax purposes. Reach out: 0703 154 483
