There are various ways one may trade or transact business in Kenya. One common means is through incorporating a company. There are two types of companies, namely; private and public companies. A private company is prohibited from inviting members of the public to buy its shares while a public company raises its capital through trading or share subscription. What then are the advantages of carrying out business through a company?

LIMITED LIABILITY

A company is a separate legal person from its owner which means that it is separate from its directors and employees. The shareholders of a company are liable to debts only to the amount of their unpaid shares. To the contrary, in the absence of any provisions, the members are completely free from any personal liability. In other words, personal property will not be auctioned where a company is under receivership to pay the creditor of a company as it would be the case for a sole proprietor.

In a company limited by shares, the member’s liability is limited to the amount unpaid on the shares. Meaning that if you have taken 50 shares in a company and have only paid up for 45 shares, you will be liable for the amount of the 5 shares not paid. In a company limited by guarantee, the member’s liability is limited to the amount they guaranteed to pay. This is provided for under Section 6 of the companies Act 2015.

HOLDING PROPERTY

A company property is distinguishable from that of the members (shareholders). In a limited liability company, the property of the company is the joint property of all the members, although their rights therein may differ from their rights to separate property because the joint property must be dealt with according to the Companies Act 2015, and no individual member can claim any particular asset to that property.

RIGHT TO SUE AND TO BE SUED

A company is a legal person and can take action in its own name to enforce its legal rights. Conversely, it may be sued for breach of its legal duties. When doing business as a company the court papers will be served upon the company and not the directors even though the company might be a sole proprietor company (company owned by one person).

PERPETUAL SUCCESSION

As an artificial person the company has neither body, mind nor soul. It has been said that a company is therefore invisible and thus exists only intendment consideration of the law. A company can only cease to exist by the same process of law, which brought it into existence. It is therefore not subject to the death of the natural body. Even though the members may come and go, the company continues to exist.

For continuity of business, it is advisable to form a company as it outlives the founder and becomes a legacy.

TRANSFERABILITY OF SHARES

Under the  Companies Act, shares of any member in a company are defined as movable property transferable in the manner provided by the articles of the company. In a company shares are transferable and upon a transfer, the new shareholder then steps into the shoes of the former as a member of the company with full rights as a member. This allows for capital injections through sell and purchase of shares.

BORROWING FACILITIES

In practice, a company can raise its capital by borrowing much more easily than a sole trader or a partnership.  This is enabled by a floating charge over all the assets from time to time, falling within certain description but without preventing the company from disposing off these assets in the ordinary course of its business until something happens to cause the charge to become crystallized or fixed.

The perpetual succession in a company is a contributory factor as the lender is ascertained of the payment.

TAXATION

Companies are subject to Corporation Tax which is governed by the Income Tax Act, Cap 470 of the Laws of Kenya. The current level of Corporation Tax is lower than income tax rates. Its amount is based on the net income that the company obtains while exercising its business activity, normally during one business year. The Income Tax Act provides a provision for the exemption of the income of certain companies upon satisfying specific criteria.

CONCLUSION

From the above discussion, conducting a business in Kenya as a company has more benefits than carrying out a sole proprietorship or even a partnership. Most investors prefer working with companies over sole proprietors for the above reasons. Further, government will award tenders to companies over individuals. Incorporating a company is easy thanks to the new Companies Act 2015.

Ngugi Mburu is a Commercial and Litigation lawyer with a reputable Law Firm in Nairobi. Email: [email protected] for any enquiries or clarifications.