Introduction
There are three main types of businesses in Kenya: sole proprietorships, partnerships, and limited liability companies.
These businesses are affected by the country’s legal, tax, and other considerations.
The three types of businesses can be broken down into five categories. These are the most common businesses for taxation purposes. The categories of the businesses are also the most registered businesses in Kenya’s formal economic sector.
- Sole proprietorship
The first type of business found in Kenya is a sole proprietorship. It is the most common type of business. It is usually operated as a first business by most persons. A sole proprietorship is the simplest form of business that one can operate in the country. The business owner registers a business name that they want to use to trade-in.
A sole proprietorship is owned and operated by the owner. The business cannot be separated from the owner. Effectively, the business does not exist, but the owner does. It is the owner who is recognized, not the business.
The business owner is the business, and the business is the owner. However, the owner decided to be the business proprietor. Apart from the business owner, no one else has the authority to make any bidding decisions regarding the business.
Therefore, the business owner assumes all the risks of the business to the extent of all of their assets, whether they are used in the business or not. The proprietor and the business are synonymous as far as the assets and liabilities of the business owner are concerned.
- Normal partnerships
The second type of business is partnerships. A partnership is a business where instead of one person operating a business, like in sole proprietorship’s case, two or more people come together to form a business organization with the sole purpose of carrying on a business, trade, or profession, and sharing in the profits.
However, a partnership is not a separate legal person or taxpayer from the business owners. Each partner contributes their expertise or other skills, money, or property to share in the business and share in the losses and profits of the business. A partnership is similar to a sole proprietorship except that it is owned by a group of owners instead of an individual owner. There are a minimum of two people in a partnership.
- Limited liability partnerships
The limited liability partnership business setup is the same as a regular partnership business setup. However, a limited liability partnership business structure shields individual partner’s from negligent actions of the other partners. Therefore, every partner is individually liable for their actions or inaction.
The partnership liabilities are limited to the individual partners. However, limited liability partnerships are not legal tax entities. As such, they are not registered for taxation purposes. Instead, it is the partners who are registered as individual taxpayers.
- Limited liability private companies
The fourth type of business found in Kenya is limited liability private companies. These companies are legal entities. A limited liability company is a separate legal entity from the owners. The companies are registered for tax as separate entities. The liabilities of a limited liability company are limited to the company and the extent of shareholding by the shareholders.
The company has rights and obligations of its own and a life separate from its owners. The shareholders own the companies, but they do not manage them in most cases. The companies are governed by the board of directors who oversee the top management in the companies.
The top management in the companies may be different from the shareholders. However, the shareholders bear responsibility and liability to the extent of their shareholding. A few individuals own a limited liability private company, which is closed to the public. The public cannot buy shares in the company.
- Limited liability public companies
This is the fifth type of business. A public limited liability company has shares owned by diverse public members. The sale of the company shares is made to the public. The public can buy and sell shares in the company. Most of the public limited liability company shares are traded in the public.
The company shares may be traded at Over the Counter (OTC) market. In this market, only the shares of the particular company are available for trading, usually to specific persons who, in most cases, are current shareholders. A particular company operates the OTC market.
Today, Family Bank Ltd is an example of a company whose shares are traded at the OTC market in Kenya. The bank is yet to float its shares to the public. However, the shares are only sold to current shareholders and no one else.
Other limited liability public companies have shares traded at the various counters at the securities exchange market. The share is traded at the Nairobi Securities Exchange (NSE) at either the first-tier or second-tier markets. An example of a company whose share is traded at the NSE is Equity Bank Ltd. The company shares are publicly held, and anyone can buy and sell the shares as long as they can afford the price.
Above are the most common formal businesses registered and operated in the country. There may be other types of businesses, especially in the informal sector. Each of the various types of business is set up to generate income in Kenya. The generated income is taxable in Kenya.
All five types of businesses should have personal identification numbers (PIN) with VAT and other taxes obligations where applicable. Each of the different types of business has tax advantages and tax disadvantages. Therefore, it is upon the business person to decide on the particular business type they want to establish and operate.
