The Pros and Cons of Incorporating a Company Vs Sole Proprietorship Registered under a Business Name
In Kenya, companies are registered under the Companies Act (No. 17 of 2015) while sole proprietorships are registered under the Registration of Business Names Act (CAP 499, Laws of Kenya). Each of these statutes and the requirements pertaining to either a company or sole proprietorship registered under a business name confer their specific advantages as highlighted below.
Advantages of a Company
- A company confers limited liability on its shareholders such that misdeeds and liabilities of the company are not imputed to the shareholders of the company. On the other hand, a business name is simply the registration of the name by which you pursue your business or trade. It does not confer limited liability to the owner of the business name such that the proprietor is liable for misdeeds and liabilities incurred under the business name.
- A company can have more than one director each of whom bear certain statutory duties; thus risk can be managed by spreading corporate liability through a bigger board. On the other hand, a registered business name cannot set up a board with statutory liability to spread the risk in corporate governance. This means that the owner of the business name bears sole responsibility unlike the case of a company where the buck stops with the board.
Advantages of a Sole Proprietorship Registered as a Business Name
- A sole proprietorship registered as a business name has one significant advantage – the flow through of income taxes such that there is no corporate taxation with respect to trade carried under a business name. You as the sole proprietor under the business name are taxed at your personal level as business expenses are deducted from all income including business income. On the other hand, a company has taxes at two levels – the corporation tax for income to the company and the dividend tax on the dividend income paid to the shareholder.
- A sole proprietorship has fewer statutory requirements to fulfil on an annual basis as compared to a company. For instance, a company may have inter alia these requirements: filing company returns; shareholder changes must be advised to the Companies Registry; certain companies must hire company secretaries; certain companies have audit requirements under the Companies Act etc. A sole proprietorship registered as a business name does not have these requirements.
- A sole proprietorship can make sense for businesses where liability in business is ascribed personally and corporate liability does not necessarily remove personal liability imputed under specified statutory law. For instance, professionals operating as solos, may not always gain a material advantage in operating as companies or LLPs because the rules of their profession ascribe certain personal liability and they are not able to escape such liability through a limited liability entity.
- A sole proprietorship registered under a business name is an easy way to form a business entity. All you need to provide is your name, place of business and contact details. This may be contrasted with the numerous forms to sign and fill when it comes to incorporating a company with the Registrar of Companies, additional to the articles of association and memorandum of association that will be prepared under company law
- No need to share profits. This is another big advantage of registering your business name as there are no shareholders to split profits with in the form of dividends. Only the proprietor of the business name is entitled to the profits of the business.
- Simplified management. A business registered under a business name does not have a board although it may have mid-level managers. This reduces the levels of bureaucracy as the sole proprietor is in charge of the business without any need to defer to a board unlike in a company where the CEO must defer important decisions of the company to the board for approval.
- Linked to simplified management is that a sole proprietorship is more flexible and can adapt faster than a company can to changing business conditions. A company engages in activities permitted by its objects as set out in the articles/memorandum of association and as permitted by its board and a majority of shareholders. Thus, if a company wished to change its business activities, this would need to be ratified by a majority of shareholders (under the shareholder/investor agreement) and the board; and if necessary filings may need to be made at the Companies Registry. However, for sole proprietorships registered under a business name, this is not necessary as there is no restriction on the sole proprietorship registered under a business name that will require such ratification or consequential filings with the Companies Registry.