Tuesday, November 16, 2010

Differences between a Business Name (Sole-Proprietorship / Partnership) and a Limited Liability Company

While consulting for our online company registration service, Incorporator I find myself answering the question "What is the difference between a sole-proprietorship and a company?"

Anybody who is considering starting a business must consider what type of business structure is needed for his or her particular situation. In Kenya there are three types of structures that one can use to start their business.

1. An LLC, or Limited Liability Company
2. A sole proprietorship
3. A Partnership

A Sole-proprietorship and a Partnership are registered through the same manner (Form BN/2) with the exception that a partnership has more than one owner and although not necessary, entrepreneurs are advised to register a partnership deed as well. In this article all references to sole-proprietorship also include partnership.

Understanding the advantages and disadvantages of each structure is important when deciding which one you want to use for your company.

 Legal Protection

The first major difference between a sole proprietorship and an LLC is the legal protection that each affords their owners against lawsuits. In a sole proprietorship, the individual owner(s) and the business are one and the same. This means that if someone sues the business, then the personal assets of the owner(s)—car, home, etc.—can be seized in any judgment against the company.

On the other hand, if your company is organized as an LLC, the company is a separate entity from the owner. If a person sues the company, only the assets of the company can be used to pay any legal judgment. The personal assets of the owner are safe.

Of course, this protection is limited. If the owner is personally negligent for wrongdoing by the company, then the liability protection is not going to stop victims of his or her negligence from being able to come after their personal assets.

Credit

Most new businesses require some type of capital to get started. Because a sole proprietorship is founded on the name of the person who owns the company, any credit and debt is the sole responsibility of that person. If the business fails and loans cannot be repaid, the owner of the company is completely liable for that bad debt. With an LLC, the business is a separate entity from the owner. This means that if the business should fail, in most cases, the debt would not be the sole responsibility of the owner.

In addition, how a business applies for credit and financing differs with each business entity. With a sole proprietorship, the credit history of the owner is the sole basis in determining whether the business is a good credit risk. If the owner has bad credit, getting the business financed is going to be much more difficult.

Because an LLC is separate from the owner, getting financed can be easier. Especially after the business has been in existence for a few months, many banks will begin to look at the credit record of the company to determine its credit-worthiness. This is obviously a major advantage to the business owner.

Legal Requirements

Another major difference between these two business entities is the requirements to maintain the legal status. Because a sole proprietorship is a business based on the name of the owner, no special fees are typically required. While the business will probably still need to obtain a business license in the area in which it is doing business, the company will not have to file annual returns every year declaring its status.

Cost of Registration
A sole-proprietorship is usually cheaper to register than an LLC. We charge KES 3,999 to register a sole-proprietorship and most advocates will register companies from around KES. 25,000.

Taxes
A sole-proprietorship being owned by one person files taxes under Individual Income Tax and the PIN certificate used is usually that of the owner. A partnership usually has its own PIN certificate but the rates of Income Tax are usually the same as that of a sole-proprietorship. An LLC must register its own PIN/VAT certificate and is charged corporate tax of 30% of profits.
 In the end, deciding which type of business entity is right for you is dependent upon your personal circumstances. Things such as your type of business, where you are doing business, and your personal financial history all come into play. Anyone who is considering starting a business truly should consult to determine which entity is best for his or her situation.

15 comments:

Anonymous said...

Great post.

Can you also do one on the mysterious 'consultant'?

startupkenya said...

Thanks Anon

Sorry I don't understand what you mean about the mysterious 'consultant'

Anonymous said...

Some people operate as consultants rather than company. is that a legally recognized institution?

startupkenya said...

Anon,

Like I mentioned before in Kenya there are only three legally recognized business structures: sole-proprietorship, partnership and limited liability company.

In practice most consultants will register as either a sole-prop or partnership. In this case the business name is usually suffixed with 'consultants'. To register as a consultant it is necessary to submit academic certificates showing the proprietor(s) capacity to undertake that consultancy.

However nothing also prevents someone from carrying out business in their personal capacity. This means there is no need to register under any of these business structures.

Wanjiku Ndung'u said...

hi

my friend and i are starting a business together, what would you recommnd we go for ? we dont have that much money but its a huge venture which might n=mean we go for a loan. what are your thoughts ? wht are the leagl requirements of a partnership ?

teph

startupkenya said...
This comment has been removed by the author.
Anonymous said...

what would you recommend for one who wishes to start a medical practice-sole or LLC?

Catherine said...

this is great. u have already answered all my question. will differently keep in touch. we are starting a business.cathy

nyambura said...

We started a chama some time ago, we want to move that chama to the next level. serious investment, money making. we started that means we have higher shares then the other members 8. currently contributing 15000 monthly. what's your legal advice for us. to make it a company.

Anonymous said...

Is it possible to start up as a sole proprietor then as the company grows you convert to LLC?
2ndly,what are the legal implications on someone operating alone and from home as a realtor hence irregular income.

startupkenya said...

@Anon March 3. For a medical practice, either a sole-prop or an LLC would work. Determining which one would better be decided by the other factors listed in the email

@Cathy. Thanks, we're happy to hear from you.

@Nyambura. Two things you'd need here. A company with a nominal capital that is greater than your investment, where one's shares are determined by their contribution and a shareholders agreement indicating what the rights, duties, and obligations of each shareholder are, as well as issues of profit and loss sharing. Drop us an email at sales at formakenyancompany dot com for more assistance.

startupkenya said...

@Anon April 1. Yes it is possible to start as a sole-proprietorship and later change this to a company. Although technically what actually happens is that you cease trading as a sole-proprietorship and then use the same name to register as a company. So legally the two are separate and distinct. As for your second question, I assume you are asking about the tax implications? If this is so, then the only thing that you must remember is that all persons earning income (whether irregular or not) are required to pay income taxes, and if you are unregistered then you would file the tax returns in your individual capacity.

Paramjeet Bhambra said...

Hi,
Great advise.
Could you please enlighten me on registration of LLC whereby one of the directors does not resides in Kenya. What are the obligations?

Regards.

PJ

redtheman said...

Thank you so much for this info. Now I have a question, if I already have a limited company but I need to start a new one which is somewhat different to the parent one, how can I associate or 'tie' the new company to the parent one.

David Maling'a said...

You can actually register your business online. Check out inc.co.ke