Introduction
Ideas often grow into businesses. As the business continues to morph and grow, one of the most important factors to consider is the best type of entity to register in order to efficiently support service delivery.
Considerations
The type of entity to register will depend on the business model proposed. Factors such as complexity, size and scale of operations come into play.
From a legal perspective the type of entity will vary based on factors such as whether the founders intend for limited liability, the intended number of members and how the business intends to raise capital; for example, while both a private and public company may raise debt capital through the capital markets, only a public company may issue its shares to the general public. Public companies on the other hand are not allowed to raise funds through a crowdfunding platform.
Types of Corporate Entities
Whilst businesses in Kenya can operate as a business name; this article which is part of a continuous series, focuses on the options under the Companies Act- Act 17 of 2015, the Partnerships Act of 2012 and the Limited Liability Partnership Act of 2011. These are:
- Company limited by shares
- Company limited by guarantee
- Unlimited company
- Partnerships; and
- Limited Liability Partnerships.
We discuss the salient features and the registration requirements of each below:
Company Limited by Shares
A company is limited by shares if the liability of its members is limited to the amount of unpaid up shares that they hold. For instance, if a member holds 20 shares each of a nominal value of KES 100, and only pays for KES 1,500 for 15 shares, then their liability for the company’s liabilities is limited to KES 500 for the 5 unpaid up shares that they hold. These amounts may be called on by the Company when it is in distress, to meet its obligations or by a liquidator during liquidation.
It is important to note that for Companies that adopt the model articles all issued shares must be fully paid up and should the company intend to allow for partial payment of shares, then there is need for customization or prudence in prescribing the nominal value attached to each share at incorporation.
Companies limited by shares can either be public or private. As noted above private companies can issue unpaid shares whether partially or otherwise, if their articles so allow. The Companies Act places a requirement on public companies to have at least one-quarter of the nominal value of its issued shares paid up.
As was decided in the celebrated case of Salmon v Salmon, a limited company is considered to be a separate legal entity from its members; which means that a Company, being separate from its members, assumes responsibility for its financial losses and debt liabilities. However, the Act allows on an application to the courts for lifting or piercing the corporate veil to attach responsibility to the individual shareholder(s) or director(s) where there is evidence of serious misconduct, injustice and fraud or where a company is merely a sham.
Private Company
A private company has a maximum of fifty members excluding its’ employees’ shareholders. It is prohibited from issuing its shares to the public. The rights of its members to transfer shares is restricted and the consent of all members has to be sought in order to add a new member. Private companies unlike public companies, do not have onerous restrictions on lending to Directors and related persons as well as pre-emptive rights. Private companies are ideal where the owners would like a closely held business and are not looking to raise equity capital from the general public or a section thereof.
Public Company
A public company should have at least two directors one of whom must be a natural person. This type of entity can invite members of the public to subscribe to its’ shares or debentures, subject to compliance with the Capital Markets Act, CAP 485A. A public company can only commence business or exercise power to borrow once it is issued with a Trading certificate which is subject to the Company holding and maintaining an authorized minimum capital of KES 6,750,000.
The liability of its members can either be limited by shares or by guarantee. The Companies Act further provides that a public company must appoint a company secretary regardless of the level of its paid-up share capital.
This business entity is ideal where the owners intend to raise capital from members of the general public or where the nature of business to be conducted is that which cannot be done by a private company e.g., acquisition of agricultural land where foreigners are members.
Companies limited by guarantee
A company is limited by guarantee if it has no share capital and the members’ liability is limited to a specified amount which they undertake to contribute in the event the company is being wound up.
This type of entity is ideal for charitable or social entities such as social member clubs where admission is subject to payment of a subscription fee. Notably, incorporation of a company limited by guarantee may take up to twelve months owing to vetting of directors and members at the point of registration.
Unlimited Company
This is a company whose members’ liability to the debts of the company is not limited. Its’ members are therefore jointly and severally liable for the debts of the company in the event the company is declared insolvent. Due to its unlimited nature of liability, this form of entity is not common. Unlimited companies are ideal where the risk of insolvency is low and where there’s need to maintain financial secrecy as there is no requirement to lodge its’ financial statements with the registrar.
Partnerships
Partnerships are unincorporated associations founded on the principle of utmost good faith. They can either be general or limited partnerships. This entity should have a minimum of two and a maximum of twenty members.
General Partnership
This entity is created by default where an association of persons come together to carry out a business for profit. Each partner takes responsibility and shall be an agent of the partnership in the business of the entity. The partners may document the terms governing their relationship in a partnership deed, in absence of which the provisions of the Partnership Act of 2012 take effect. It is important to note that the liability of the partners to the debt of the business is unlimited.
Limited Partnership
A partnership is limited if it has one or more general partner each with unlimited liability and one or more limited partner. This entity is governed by the Partnership Act of 2012.The liability of the limited partner is limited to the amount of capital contributed to the partnership. The general partner in this entity must be a natural person whereas the limited partner can be a body corporate. The limited partners do not take part in the management of the partnership business. Death of a member does not affect continuity so long as membership does not fall below the minimum. This business entity is ideal for short term projects or ventures or professional firms.
Limited Liability Partnership
This form of partnership is a hybrid of a Limited Liability company (LLC) combining the features of an LLC and a Partnership. This entity is governed by the Limited Liability Partnership Act of 2011.Unlike the preceding partnerships, a limited liability partnership has to be registered with the registrar of Limited Liability Partnerships. Upon registration, an LLP becomes a body corporate whose legal personality is separate from the partners. Both a natural and a body corporate can be partners in an LLP.
There has been a massive shift by professionals from other business entities to limited liability partnerships which can be attributed to its features. A partner in this entity is not liable for the wrongful act of another partner in the LLP. Where the wrongful act was in the course of the business of the partnership, the partnership and the individual partner are liable to the same extent. Since the LLP can sell, acquire and hold property, the liabilities of the LLP are payable out of it.
Conclusion
This is a brief summary of the types of entities that can be registered in Kenya. It is always wise to seek the advice of a qualified experts whilst undertaking such registration procedures for guidance on what type of entity is best suited for your venture.
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DISCLAIMER:
This briefing is a highlight of legislative and policy changes and is intended to be of general use only. It is not intended to create an advocate-client relationship between the sender and the receiver. It does not constitute legal advice or a legal opinion. You should not act or rely on any information contained in this legal update without first seeking the advice of an advocate.