Whether you are going it alone or with another person, it is best to consult to determine which form of business organization in Kenya will be best for you. Your choices and the attributes of each form are essentially as follows:
A sole proprietorship is one person alone. He will have unlimited liability for all debts of the business, and the income or loss from the business will be reported on his or her personal income tax return along with all other income and expense he or she normally reports (although it will be on a separate schedule). Although proprietorship avoids the expense for forming a partnership or corporation, many start businesses this way because they are unfamiliar with the other forms of organizations.
In a general partnership each of the two or more partners will have unlimited liability for the debts of the business. The income and expense is reported on a separate return for tax purposes, but each partner then reports his pro-rata share of the profit or loss from the business as one line on his personal tax return.
With a limited partnership , each of the general partners has unlimited liability for the debts of the partnership, but the limited partner’s exposure to the debts of the partnership is limited to the contribution each has made to the partnership. With certain minor exceptions, the reporting for tax purposes is the same as for a general partnership.
A corporation provides limited liability for the investors. Except as indicated below, none of the shareholders in a corporation is obligated for the debts of the corporation; creditors can look only to the corporation’s assets for payment. The corporation files its own tax return and pays taxes on its income. If the corporation distributes some of its earnings in the form of dividends it does not deduct the dividend in computing its taxes, but the shareholder recipients must pay taxes on those dividends even though the corporation has paid taxes on its earnings. A corporation has some tax benefits such as deductibility of health insurance premiums.
A corporation that has made an election to be an “S” Corporation for federal income tax purposes is treated as a partnership for tax purposes although it is treated as a regular corporation for other purposes.
A limited liability company provides limited liability for all of its members, but typically can be treated as a partnership for federal income tax purposes. State laws may differ as to whether it is treated as a partnership or a corporation for state income tax purposes. It can be managed by all of the members or can have centralized management in one or more of the members.
Obviously there are variations in these rules and you should consult with your attorney and/or accountant in each specific case to determine what form of organization best fits your needs.
One of the things to consider in making the final decision is that although a corporation has limited liability for its shareholders, if the corporation does not have sufficient assets various creditors may insist on personal guarantees from the shareholders. Examples are your landlord, some suppliers, and, by law, liability for certain payroll taxes and liabilities to employees.
Laws That May Affect You There are many laws that are applicable to owners of small businesses. It is best to consult with professionals to determine which laws will be applicable to you, what permits you will need to commence business and where to go to comply with the various rules. Your attorney should be able to assist you in complying with labor laws such as the employment of minors, illegal aliens and workplace safety rules. Your accountant should be able to assist you in filing:
Income tax returns
Value Added tax (VAT)
Your attorney may be able to help with requirements for business licenses including special licenses for particular businesses as well as building codes and permits for remodeling and zoning laws, health department requirements and environmental laws.
How Can Your Professionals Help You? Your attorney
In addition to the above items, your attorney should draw your partnership agreement, or form your corporation, including the issuance of stock and appropriate filings with the necessary documents with the necessary authorities. He or she will help advise on the best form of ownership, assist in negotiations to buy an existing business and review documents if you are buying a franchise. He or she will also advise on buy-sell agreements and draft appropriate documents.
If your business will require renting an office, store or factory, your attorney should review and approve your lease document. A lease obligation can become your biggest liability and your attorney can help negotiate fair and protective terms. For example, if you anticipate growth, your lease should include a provision for how expansion requirements will be handled.
Your new business may require specialized legal advice to establish and protect your intellectual property rights. Intellectual property includes your ownership rights to your business name, trademarks, copyrights and patents. Intellectual property law is a specialized field and you may need an attorney who specializes in these matters.
Your accountant can be an important advisor in start-up decisions, such as:
To decide what would be the appropriate division of the capital you contribute to a corporation between stock and loans
To determine the best form of ownership
To help set up the books and records of the business
To advise on computer needs for accounting purposes.
He or she will have a continuing role in filing tax returns, advising on compensation of owners, preparing financial statements, helping forecast cash needs, including whether to expand, addition of employees, and whether you are really making money in this venture.
Its Recommended that :
Before you start-up, collect referrals to and references about lawyers, accountants and insurance agents so you can select the most appropriate professional advisors well before the time you will need their services. Perhaps they will provide you with initial free consultations for your considering them as members of your professional team.