The government through the office of the Attorney General Business registry department registers business entities for them to be recognized legally. In Kenyan businesses that are run for profit-making can be registered as either sole proprietorships, partnerships or limited companies. Often most entrepreneurs start by registering their business as a sole proprietorship where they are the sole owners. However, as the business grows they upgraded and convert the business name into a limited company.
In this article, we will focus on why you should upgrade your sole proprietorship or partnership business to a Limited company. In a nutshell, we will highlight the:
- Overview of Business Formations
- Why you should upgrade your business name.
- Benefits of having a Company over a Business name.
- How to upgrade the Business name to a Limited Company
- Changes that come with converting from the Business name to a Limited Company.
An Overview of Business Formations
As indicated in the introductory paragraph, profit-making entities in Kenya can be registered in Kenya as either;
- Sole Proprietorship
- Partnership
- Limited Company (Private Limited or Public Limited)
The significant difference between these types of business entities can be summarized in terms of their ownership structure, liability etc
| Business Entity Contrast Differences | Sole Proprietorship | Partnership | Limited Company |
| Ownership | Owned by One Person | Owned by 2-20 People | Owned by a Group of Shareholders. A private Limited Company has 1-50 Shareholders A Public Limited Company has more than 50 Shareholders. |
| Liability | The Owner has unlimited liability | The Liability is shared across the Partners based on their Profit and loss-sharing ration | Shareholders have a Limited Liability to their Share Capital. |
| Profit and Loss | The owner enjoys all the profit alone. In case of a loss, the owner bears the full loss alone. | The profit and loss of the business are divided across the partners based on their profit-loss-sharing ratio. | Shareholders enjoy the Profit which is allocated inform with declared dividends according to the shares they own. |
Why you should upgrade and convert the business name to a Limited Company.
A sole proprietorship business model is registered as a Business name. The issued certificate of registration captures and states the registered name, the name(s) of the proprietor(s), the business location and the unique business registration number.
Sample Business Name Registration Certificate
Have you checked out some tender invitations to supply to the government, parastatals or private companies? Most of the tender invitations are only reserved for businesses registered as Companies, therefore with your registered business name, you can bid for such tenders.
These are some of the limitations that a business name has, as a sole proprietor operating a business name, your personal KRA PIN is used for taxation services.
Benefits of having a limited company over a business name
- Limited liability
- Professionalism
- Continuity of business and ease of transfer
- Tax efficiency
- Investing and lending opportunities
Limited liability.
A limited company has limited liability. The company is a legal entity, separate from its owners. This aims at reducing personal exposure to financial risk. This is the state of shareholders being legally responsible for the company’s debts to the extent of their nominal values only, which means that individuals in the company owners are protected against being liable for debt beyond their share in the company. However, this is not the case for a business name, where the business owner is responsible for the debts of the business at a personal level.
Professionalism
There is a professional image provided by a limited company, that s not found in a business name. The professional status of a limited company structure will add valuable prestige and credibility to your business. There are instances where certain agencies, contractors, or sectors prefer working with limited companies. This is because of the legal protection that comes with it. Agencies and contractors prefer limited companies due to the level of risk involved in giving out contracts.
Continuity of business and ease of transfer.
A limited company will continue with its business in the case of the death or withdrawal of a shareholder. In a limited company, there is a transfer of shares in case one of the shareholders desires to leave the company. Also, at the death of one of them, there can be an incorporation of another shareholder without interfering with the business of the company. In a business name, the death or withdrawal of the owner means cessation of the business. There can be no continuation of the business without the owner.
Tax efficiency.
A business name uses the KRA PIN of the owner, meaning that in case of any penalties, the owner is responsible. On the other hand, a limited company uses the company PIN, hence no individual is liable in the case of penalties.
Investing and lending opportunities
Having multiple owners or shareholders in a limited company, it is possible to sell shares to new investors, therefore raising additional capital. It is often easier to secure a loan for the company without having the shareholders provide security against their personal property. Additionally, limited companies have access to more lending opportunities than business name entities.
How to convert the Business name to a Limited Company
Converting a business name to a limited company involves several steps. The process is similar to that of incorporating a new company.
Before starting the process, the business must be Linked on ecitizen platform. Most Business names that were registered before 2015 are not linked.
The Business Linking service entails updating businesses registered in the past into the new Business Registration System for efficiency, for instance doing a business search.
Before converting the business name, the business must cease operating and an application made on the ecitizen for a cessation to convert to limited. (B/N6 Form)
The Certificate issued by the registrar must also be surrendered back to the register as per the Registration of Business Names Act (Cap 499) 15(6)
Once the cessation is processed by the registrar, the process to upgrade the Business name can be proceeded with submitting other details for incorporating the company including the details of the directors and shareholders, the business address and other details. On completion of the process of conversion, the business will get a Certificate of Incorporation under the name that it was previously registered as a business name. However, the registration number will be different and it will be effective on the date it was entered into the register of companies.
Convert Business Name to Company Today
Changes that occur when a business name is converted to a limited company
After converting a business name to a Limited company the business will retain the name but have an extension of limited e.g. a Business name that was XYZ Enterprise will be XYZ Enterprise Limited, however, there are several changes that will occur. This includes;
- A Certificate of Incorporation will be issued
- The registration date will be different
- A new Registration number
- The Company will be Issued its own KRA PIN Certificate
When you convert the business name to a limited company, you must also make sure you rebrand your business. Get updated business cards, Invoice books and company profile.
With the limited company now, you must ensure all your business correspondence including the letterheads, and the accounting (Invoice and Receipt books) reflect the changes to the limited company.
It will also be prudent to notify all the business associates, customers and suppliers of the new changes, that the business is now a limited company. For instance, a customer who is about to pay must get the new name including the Limited to draw the cheque.
After converting the business name to a limited company, you will be required by your banker to open a new Business account, This is because the newly converted business is now a company with a different identity including the registration number.
Wrap Up.
Often people start a business by registering their business as Business Names where they run the business alone, this is because it’s cheaper and at times because they are not informed on why they should consider registering the business as limited companies.
As their business grows they encounter some hurdles in the business process such as disqualification to bid for some tender that only pre-qualify limited companies.
To others, their business grows successfully and they have to incorporate into limited companies since they have limited liability and also perpetual success amongst other benefits as we have highlighted in his article.
The process of converting a business name to a limited company will require one to get the best out of it including branding the new business to breathe in a fresh start. You can engage us to offer professional advice and guidance on converting the business to a limited company.
Our contacts are, Email: info@anzianoconsultants.com Tell: +254706600875 WhatsApp: +254706600875
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