What type of company should you register in Kenya?
When looking into a business venture or expanding an existing business, I highly recommend that you have a clear understanding of the types of entities that are available. If you plan to register a company in Kenya, the type of entity you select will impact your future business. It is therefore critical to start on the right track.
If the type of entity selected is inadequate, it will automatically generate waste of time, additional costs and frustration at some point of your development. This is why I strongly insist on understanding what type of entity suits best your project. It is important to ensure you start your business venture in East Africa with accurate information pertaining to the entity to avoid confusion. Now, this pushes us forward to assessing the pros and cons of the different options.
Below is a list of the different types of entities available when you want to register a company in Kenya. Indulge us as we elaborate more on each type of entity. This is meant to provide valuable insights to foreign investors and decision-makers before they register a company in Kenya.
Business Name or Sole Proprietorship
A Business Name is the simplest entity where one is equal to the business. Let me expound. A Business Name is usually the investor’s name. Then, it is impossible to separate the person (who is the owner) from the business (which is the entity). Therefore, the Business Name is not considered a separate legal entity. The liability of the owner is not separate from his/her business. Generally, the registration of a Business Name is also quite straight-forward. And because the entity is a sole proprietorship, maintenance of the business is also made easier. For example, accounting can be done individually on Excel and you don’t need to perform an annual audit when you file your annual tax returns. Obviously the decision-making process is easier too, as it solely relies on one person. This status is ideal for consultants or entrepreneurs in short-term projects.
Private Limited by Shares
In a company limited by shares, the liability of its directors and/or shareholders is limited by the Memorandum of Association to the amount of shares in possession of the shareholder(s). It is then a Kenyan company with its own board (what happens in Kenya, stays in Kenya). The Private Limited by Shares is basically the most common type of entity selected by foreign investors to register a company in Kenya. It can have multiple owners and it is therefore considered as a separate legal entity from the owners of the company.
Therefore, when we say the company is considered a separate legal entity. It basically means that the company is subject to various obligations. The obligations include, but are not limited to: filing of the annual returns at the registrar of companies, independent audit of the accounts, corporate tax of 30% on profits.
Branch – Foreign Company
An investor could be interested in setting up a new location, division, department under the original company’s name and is still part of that legal entity to conduct business on behalf of the mother company. In this case, the mother company is not excluded from liabilities incurred at the Branch level. A branch does not require to have a local board. The branch registration process and winding-up processes are less complex. This is why this type of entity is ideal for short-term activities.
Unlike the Private limited by shares, a branch is exempted from filing returns to the registrar of companies. This is because the mother company files on behalf of the branch. The lower side of this is that taxation is much higher for the Branch, it rises up-to 37.5% on profit. The maintenance fee that is usually sent directly to the mother company is also subject to taxation.
Limited Liability Partnership
The LLP formation is popular when a professional partnership would like the benefit of protected liability. This is particularly suited to accountants, solicitors, architects, consultants, surveyors and other fields of expertise where a partnership can be preferred to a limited company. Within an LLP the earnings of the members is normally seen as personal income. Being a separate legal entity to the members, the LLP can buy, rent, lease, own property, employ staff, enter into contracts, and be held accountable if necessary. Public disclosure is the main disadvantage of an LLP.
Limited by Guarantee
Lastly, a company limited by Guarantee is often referred to as a ‘not for profit’ or ‘Charitable company’. It refers to the fact the parties involved do not remove the profit from the company as shareholders can in a company limited by shares. Any profit made by the company is re-used for the good of the business.
A Company Limited by Guarantee has members who act as guarantors. This means that it allows the entity to have multi-membership. A company limited by Guarantee has a very similar structure to a company limited by shares. Indeed, they have directors appointed to manage the day to day running of the company.
Interestingly enough, according to the Registrar of Companies, the members and directors are required to undergo vetting by the National Intelligence Service (NIS). When the vetting is complete, then we can proceed with its registration.
Impact of the shares on immigration status of the shareholders
In reference to immigration legal requirements, it is important to note that Foreign Investors are required to have the right Work Permit to validate their exclusive business activities in the country. They’re eligible for either an investor work permit (commonly known as Work Permit Class G) ; or employment work permit (Class D). Shareholders and sole proprietors are eligible for investor permit. Directors for the business entity are eligible for class D.
The distinction of the two work permits lies on the Immigration regulatory requirements for the proof of $100,000 investment capital. This amount must be located in the local bank account in Kenya. It is the main condition for the Investors to qualify for class G work permit.
In line with the principle of separate legal entity, the investor can recruit Directors and other employees to assist in the day to day running of the business. Therefore the employees will be required to have a valid employment work permit (Class D)
For a successful company registration, an investor is required to be in constant contact with professionals. The investor must be correctly informed about the specificities of local business environment. It ranges from taxation matter, business venues, business registration processes and the many requirements for compliance with the Kenyan law.
Accessing valid information from the Registrar of Companies can sometimes be a challenge since the business environment and its legal framework are regularly updated. Therefore, business successful registration is not only about submitting an application file. It is more about receiving valuable insights from your partner locally that will help you to implement your strategy without a hitch. It is only this way that you will enable your business structure to start off successfully.
Once your company is duly registered in Kenya, then you can apply for a Tax Identification Number in order to start your payroll with the recruitment of local employees and expatriate staff.