Kenya is a fast growing economical hub and it’s not just Foreign Investors who are dipping into this jar of honey. Local entrepreneurs are taking advantage of the vast opportunities in Kenya while contributing to economical growth of the country. In 2018, the Kenyan SME Finance Survey revealed that Small and Medium Enterprises (SMEs), create jobs and boost the economy. In their 2014 survey, they revealed that 80% of the 800,000 jobs created that year came from the informal sector dominated by SMEs.
Recently, a National Economic Survey done by the Central Bank of Kenya indicated that SMEs contribute to 98% of all businesses in Kenya, create 30% of jobs and further contribute to 3% of the country’s annual GDP, which was at a 6.4% projection as of 2017.
If you are a budding entrepreneur you are on the right track. Before proceeding to build the country, however, it is important to know the basics of company formation that will best suit your business, not just in the short term, but long term as well.
Assuming you have your business idea, and have written your business plan, (if not, engage us here for Professional Business Planing Services), it is important to note the two types of Business Registration options available for SMEs in Kenya; Sole Proprietorship/Partnership (Business Name) and a Limited Company. There is a never ending debate about which entity works best for SMEs, and we have our take on this based on our decade-long experience in business registration and company set-up.
A sole proprietorship is the type of set up whereby the business and the owner are regarded as one entity. The business has no legal standing on its own, so all liabilities are charged to the owner hence all liabilities from the business will be charged to you. What does this mean? This means that if the business runs into financial trouble, creditors can bring lawsuits against you the business owner. If such suits are successful, will be personally liable for the loan, which, depending on the amount and avenue borrowed, can potentially consume all personal assets.
A Limited Company on the other hand, is a legal entity on its own and all liabilities charged to the company and not the owner.
We have seen many start-ups register a sole proprietorship, firstly because it is the cheapest option, and secondly because they fee like it is a less complicated business mode, so of course Kenyan business owners will be quick to choose a Business name over limited companies. However, cheap eventually becomes expensive. The idea of starting small and cheap makes sense, but one will never know how fast the business will grow necessitating them to convert the Business name into a Limited Company (Read about the Process to convert a Business Name Here).
Eventually, even if an entrepreneur chooses to risk it all and open a sole proprietorship in Kenya, somewhere along the line, he/she will have to upgrade to enjoy access to advanced and exclusive business opportunities that guarantee a high growth rate. Business owners still part with the very same money they wanted to save by opening a sole proprietorship in upgrading to a limited company.
Our advice to entrepreneurs is unless your business activities are to the very minimum and chances of liabilities like debt are low, don’t rush to opening a business name just because it is the cheapest option. Assess the risks amassed by registering a business name as compared to a limited company in Kenya and decide. Our take is to start a limited company once and for all and proceed with growing your business without running through roadblocks to your progress and wasting time upgrading. P.S: registration takes around the same time so there really is no ‘faster option’.
The Examples above were just the Tip of the Iceberg. Click here to read more on the advantages of registering a limited company over registering a business name . It will also help you make up your mind when choosing between Registering a Business Name or a Limited Company In Kenya