Introduction

In Kenya, there are several forms of legal business ownership. They include sole
proprietorship, partnerships and limited liability companies

Table 8: Summary of business formations

Business Form Liability Continuity Management Primary

investment
sources
Proprietorship · Personal Ends with · Personal Personal
owner’s death savings
· Unlimited or decision · Unrestricted
General Partners Ends with any · Partners Personal
partnership partner’s savings by
Unlimited death or · Restrictions depend partners
decision on partnership deed
Limited liability Capital invested Perpetual · Board of directors Sale of stocks
company even in death of shares
Limited of director or · Restricted by
shareholder Memorandum and
articles of
association
 

Sole proprietorship
A sole proprietorship is a form of business entrepreneurship that is established and
owned by one person who shares all profits and all the losses. This person is also the
one who legally liable for running the enterprise such that the business owner and the
business are treated as one entity. Therefore, the sole proprietor is in direct control of
all elements of the business and is legally accountable for its assets and liabilities.

Characteristics of sole proprietorship

1.    Easiest form of business to set up and operate

2.    Profits are taxed only once

3.    Unlimited legal liabilities

4.    Business ends with death of owner

5.    Easy to liquidate

6.    The owner enjoys all the profit

7.    Faster decision making

Advantages of sole proprietorship

1.    Flexibility of control and decision-making

2.    Easy income taxation accounting because it is filed with personal income

3.    Minimal costs to forming a sole proprietorship

4.    Forming is very simple - just a few formal business requirements and quick
registration

5.    No sharing of profits

Disadvantages of sole proprietorship

1.    Unlimited personal liability because owner is held personally liable for the debts
and obligations of the business.

2.    Life of business ends with death of the owner

3.    Heavy burden of management and limited support in decision-making

4.    Limited Ability to Raise Capital since investors won’t usually invest in sole
proprietorships

How to register sole proprietorship business in Kenya

The Registrar of Companies is responsible for business registrations in Kenya. The
process of registering a sole proprietor business in Kenya is a very simple. It can be
done at the Registrar of Companies office in Nairobi or at a Huduma center across the
country. Huduma centers are one stop shop for public services by all Government
departments and are spread across major commercial centers in Kenya.

1.    Business name search

Name search can be done in person or through an agent at any Huduma centre, via
mobile device *271#, online using e-citizen portal, and at the Registrar of Companies
chamber in Nairobi. This takes a duration of one (1) to two (2) days. You can submit as
many business names for search as you want but each business name will charged
(Kshs 100 – equivalent to $1.00).

2.    Submit sole proprietorship registration application form BN/2

Upon picking the Business Name Search results from Registrar of Companies you will be
given a registration form BN/2 which is also available in the e-Citizen portal. The filled
form is submitted alongside the required fee of Kshs 800 (approximately $8.00). The
processing of the application takes approximately three (3) to five (5) working days. The
fill-in details include:

Business Name Suggestions – select your preferred business name based on the
successful name search results

•        Nature of Business – For example real estate, road construction, business

consultant, tours & travel.

•        Plot No./ Land Reference Number

•        Street Name

•        Town Name

•        Postal Address

•        Full names (As shown on ID or Passport)

•        Age – (in years)

•        Gender – (Male or Female)

•        Nationality

•        Usual Place of Residence

•        Other Business Occupation (optional)

The applicant will need to provide proof of identity documents as follows:

•                    Copy of ID/Passport

•                    Passport Photo

•                    Copy of KRA PIN Certificate

Upon successful registration the certificate of registration will be available for download
at the eCitizen portal.
 

Partnership
A partnership is any two or more individuals who contribute money, labor, and skill to a
business, and who share in its profits, losses, and management. The two most common
are general and limited partnerships. The Partnership Act of Kenya Cap 29 allows up to
20 partners to be listed in the partnership .While it is not required by law in many
countries, a partnership deed is important for partnerships to help solve disagreements
and other difficult-to-resolve issues that naturally occur in nearly every business
relationship. Key areas in a partnership deed include: Its name; purpose; duration;
responsibilities; performance and remuneration of each partner; contributions of
partners (cash, assets, loans, investments, and/or labor); if a partner loans the company
money, what will be the terms or repayment; partner’s compensation for contribution
made, and so forth.

A general partnership is one in which all of the partners have the ability to actively
manage or control the business. This means that every owner has authority to make
decisions about how the business is run as well as the authority to make legally binding
decisions. Unless the partners have a partnership agreement, each partner will have
equal authority.

Partners in a general partnership don't have any limit on their personal responsibility for
the debts of the business. This means that the partner could lose more than just his
investment in the business because personal assets would have to be used to pay
business debts if necessary. Each partner in a general partnership is also "jointly and
severally" liable for debts of the business. Joint and severable liability means is that
each partner is equally liable for the debts of the business, but each is also totally liable.
So if a creditor can't get what he is owed by one or more of the partners, he can collect
it from another partner, even if that partner has already paid his share of the total debt.
If someone sues your partnership and obtains a large judgment, and your partner
doesn't have the money to pay his share of it, you will have to pay the entire amount.

A limited partnership requires a partnership agreement. Some information about the

business and the partners must be filed with the appropriate state agency (Registrar of
Companies). Additionally, a limited partnership has both limited and general partners. A
limited partner is one who does not have total responsibility for the debts of the
partnership. The most a limited partner can lose is his investment in the business. The
trade-off for this limited liability is a lack of management control: A limited partner does
not have the authority to run the business. He is really more or less an investor in the
business.

 
A limited partnership must have at least one general partner. The general partner or
partners are responsible for running the business. They have control over the day-to-
day management of the business and have the authority to make legally binding
business decisions. The partnership agreement will specify exactly which partner or
partners have certain responsibilities and which have certain authority. General
partners are also subject to unlimited personal liability for the debts of the business.
The general partners of a limited partnership are also jointly and severally liable for the
debts of the business, just like partners in a general partnership.

Characteristics of partnerships
1.    Existence of an agreement: Partnership is the outcome of an agreement between
two or more persons to carry on business. This agreement may be oral or in writing.

2.    Sharing of profits: The purpose of partnership should be to earn profits and to share
it. In the absence of any agreement, the partner should share profits (and losses as
well) in equal proportions.

3.    Agency relationship: The partnership business may be carried on by all partners or

any of them acting for all. Thus, the law of partnership is a branch of the law of Agency.
To the outside public, each partner is a principal, while to the other partners he is an
agent. It must, however, be noted that a partner must function within the limits of
authority conferred on him.

4.    Membership: The minimum number of persons required to constitute a partnership

is two. The Act, however, does not mention the upper limit.

5.    Nature of liability: The nature of liability of partners is the same as in case of sole
proprietorship. The liability of partners is both individual and collective. The creditors
have a right to recover the firm’s debts from the private property of one or all partners,
where firm’s assets are insufficient in case of general partnerships.

6.    Fusion of ownership and control: In the eyes of law, the identity of partners is not
different from the identity of partnership firm. As such, the right of management and
control vests with the owners (partners).

7.    Non-transferability of interest: No partner can assign or transfer his partnership

share to any other person so as to make him a partner in the business without the
consent of all other partners.

8.    Registration of firm: Registration of a partnership firm is similar to sole

proprietorship. The only document among partners required is the ‘partnership deed’ to
bring the partnership into existence.

Advantages of partnerships
1.    Better decision making - two heads (or more) are better than one

2.    Easy to establish and start-up costs are low

3.    More capital is available for the business from the partners

4.    Have greater borrowing capacity from financial institutions than a sole

proprietorship

5.    High-caliber employees can be made partners

6.    Income splitting between partners can result in tax savings

7.    Limited external regulation and tax obligations since taxed with personal income

Disadvantages of partnerships
1.    Unlimited liabilities to partners

2.    Complex to manage with risk of disagreements and friction among partners and
management unlike with sole proprietorship

3.    Company is dissolved with death of any partner

4.    Each partner is an agent of the partnership and is liable for actions by other
partners creates risk if one partner errors

5.    Anytime a partners join or leave, you will probably have to value all the partnership
assets and this can be costly.

How to register a partnership business

In Kenya application for partnership registration can be done at the Registrar of
Companies in Nairobi, at e-citizen portal or using one stop Government service shops
called huduma centers. In additions it requires the following information:

1.    Name of Business – (A name search needs to be performed first as part of the

registration process.)

2.    Nature of business

3.    Address of the principal place of business – (Plot No., Section and Name of Street or
Road, Name of Building)

4.    Postal Address
5.    Address of any other place of business (Branch Office)

6.    Partner Information including Full names, Nationality, Age, Gender, Place of

Residence and Professional Occupation e.g. Teacher, Doctor, Engineer

7.    Signature on Application Form

8.    Copy of ID/Passport for each partner

9.    Copy of KRA PIN Certificate for each partner

10. Passport Photo for each partner

Limited company
A limited liability company (LLC) is a corporate structure whereby the members of the
company cannot be held personally liable for the company's debts or liabilities. It's
owned by shareholding so that profit is shared by the shareholders whose operations
are chartered by the Memorandum and Articles of Association.

Table 9: Summary on limited company

BASIS FOR MEMORANDUM OF ARTICLES OF ASSOCIATION

COMPARISON ASSOCIATION
Definition Memorandum of Association
(MOA) is a document that
contains all the fundamental
data which is required for the
company incorporation.
Registration MOA must be registered at the
time of incorporation.
Scope The Memorandum is the charter,
which characterizes and limits
powers and constraints of the
organization.
Status Supreme document.
Power The memorandum cannot give
the company power to do
Articles of Association (AOA) is a
document containing all the rules
and regulations that governs the
company
The articles are registered as
subsidiary of the MOA.
The articles demonstrate obligations,
rights and powers of individuals, who
are endowed with the responsibility
of running the organization and
administration.
It is subordinate to the
memorandum.
The articles are constrained by the
act, but they are also subsidiary to
 anything opposed to the
provision of the companies act.
Objectives The memorandum contains the
objectives and powers of the
company.
Validity The memorandum is the
dominant instrument and
controls articles.
the memorandum and cannot
exceed the powers contained
therein.
The articles provide the regulations
by which those objectives and
powers are to be conveyed into
impact.
Any provision, as opposed to
memorandum of association, is
invalid.

Characteristics of limited liability companies

In Kenya two categories of companies fall in limited liability companies by shareholding.
These are Public companies limited by shares and the Private companies limited by
shares (Companies Act, Cap 486 and the revised Companies Act No. 17 of 2015)

Table 10: Key Features & Distinctions (In Cap 486)

ASPECT PUBLIC COMPANIES PRIVATE COMPANIES

Purpose: Intended for business and Intended for business, trading and
public investment. other commercial purposes. Most
suitable for families, friends and
relatives.
Membership Minimum seven members Minimum two members and a
with no maximum maximum of fifty(50) excluding
membership employees
Directorships At least two directors At least one director
Transfer of The company may transfer The company is restricted in the
shares or sell its shares to the transfer of its shares and the shares
members of the public are not freely transferable.
Financial privacy They are strictly regulated There’s no requirement for publishing
hence the financial financial accounts of a private
accounts are published and company
filed with the Registrar
Capital ·         No minimum ·         No minimum authorized capital
authorized capital/ nominal required.
capital prescribed.
·         Restricted ability and means of
·         Enjoy increased raising capital and borrowing.
ability to raise capital by
listing its shares at a
securities exchange and
issuing debentures from the
members of the public
Company Must have a Company Must have a Company Secretary duly
Secretary Secretary duly appointed appointed and practicing in
and practicing in accordance with the law.
accordance with the law.
 

Table 11: Distinctions and Salient Features as Per Companies Act, 2015

ASPECT PUBLIC COMPANIES PRIVATE COMPANIES

Purpose: Intended for business and public Intended for business, trading
investment. and other commercial purposes.
Most suitable for families, friends
and relatives.
Name: If a Limited Company, the name If Limited, the name must end
must end with “Public Limited with “limited’ or “ltd”
Company” or “plc.”
Membership: Any one or more persons may form Any one or more persons may
a public company form a private company up to a
maximum of 50 members.
Directorships: At least two directors (at least one At least one director
director must be a natural person)
Minimum Authorized minimum capital of Kshs. No minimum capital requirement.
Capital 6,750,000/=
Allotment of Cannot allot shares unless at least No restrictions on allotment of
shares one-quarter of their nominal value shares
and the whole of any premium has
been paid up.

 
Trading Must be obtained before conducting Once the Certificate of
Certificate business or exercising borrowing Incorporation is issued, the
powers company may commence
business.
Transfer of The company may transfer or sell its The company is restricted in the
shares shares to the members of the public transfer of its shares and the
shares are not freely
  transferable.
Financial They are strictly regulated hence Required to file annual audited
privacy the financial accounts and director financial statements (unless
reports are published and filed with exempted) to Kenya Revenue
the Registrar of Companies Authority and annual director
reports to registrar of companies.
Capital Minimum authorized capital Restricted to its ability and
means of raising capital and
borrowing.
Company Must have a company secretary Does not have to appoint a
Secretary secretary unless with paid up
capital of at least Kshs. 5 million
and above
 

Other form of limited liability in Kenya is Limited Liability Company by Guarantee. A

company may be limited by guarantee whereby the company’s memorandum of
association provides for liability on the part of its members to contribute a fixed sum of
money towards its debts, should the company be wound up. This form of company is
most useful where incorporation is necessary or desirable but there is no immediate
need for capital to carry out the objects of the company; and it is desirable to limit the
liability of the members. It is an option to consider for not for profit organizations (clubs
and associations). It is also appropriate for professional, charitable organizations, trade
and research associations. Such a structure is particularly useful where it is desirable to
avoid the need to transfer a share every time a member leaves or joins.

According to Companies Act Cap 486, one may establish either a Company limited by
guarantee with or without shares. However, Companies Act, 2015 only allows
companies limited by guarantee without share capital to be established. In Kenya, the
Registrar of Companies does not incorporate companies which are limited by guarantee
without prior clearance from National Intelligence Service (NIS). The process for
obtaining this clearance is time-consuming and uncertain, and as a result very few of
such companies have been registered as such in Kenya.

Advantages of Limited Liability Company

1.    They are a separate legal entity from their Members, artificial body corporate

2.    Limited liability for their Members so property of the shareholders (owners) is

separate from the company and cannot be charged in case of loss in the firm

3.    They are taxed separately from the owners.

4.    Improved quality of decision making and management

5.    Easily transferable ownership by sale of shares

6.    Easy to attract capital and investors

7.    Exist in perpetuity in case of death of an owner

Disadvantages of Limited Liability Company

1.     Cost and time in incorporating

2.     Double taxation of revenue by corporate tax and later for the dividends
3.     Highly regulated and requires more statutory accounting and reporting

4.     Potential loss of control to shareholders

5.     Sharing of profits with shareholders as dividends

How to register Limited Liability Company

1.    Application and reservation of name. The name search and reservation process
can be done at any of the Huduma Centers countrywide, online using the e-Citizen
platform and on a Safaricom mobile phone by dialing *271#.

2.    Submit Filled Form CR 1 (see Appendix 1) – Application to register a company

containing the proposed name (as reserved), the registered office, liability of members
(whether limited by shares or by guarantee), the nature of the company (if private or
public) and the name, consent of the initial director and secretary of the company and
address of the agent if an agent is used to make the application. The form combines the
application for company registration, Kenya Revenue Authority (KRA), Personal
Identification Number (PIN), National Health Insurance Fund (NHIF), and National Social
Security Fund (NSSF) registration.

3.    Submit Filled Form CR 2 - Model memorandum for a company limited by shares

or (Form CR 3) Model memorandum for a company limited by guarantee or (Form CR 4)
Model memorandum for a company whose liability is unlimited.

4.    Statement of Nominal Share Capital form.

5.    Notification of directors’ residential address. (Form CR8)

6.    Articles of Association (if those provided in the Regulations have not been

adopted).

7.    Applicants should attach copies of identification documents.

For Kenyan Citizens attach copies of directors:

·         Identification Card (ID)

·         Personal Identification Number certificate (PIN)

·         Passport size photo (colored)

For Non Kenyans (Foreigners) attach copies of directors:

·         Passport pages with bio data

Passport size photo (colored)

 

Registration of Clubs, Associations and Societies

A “society” in Kenya includes clubs and associations of ten or more persons registered
with the registrar of societies in accordance to Societies Act Cap 108. Consists of at
least five persons and not more than forty persons. The members of the association
have a common agenda which the association seeks to satisfy. The association by law is
required to, within a period of sixty days from the date of its formation, and application
for registration should be made. Every registered society should furnish the registrar
annually with the Annual Returns of the previous year by latest 31st March by filing in
the prescribed Form I and at a prescribed fee based on the number of members. The
requirements for Society registration in Kenya are:

1.    A list of designated members (10 members minimum);

2.    The names, occupation and postal addresses of the officials Chairman, treasurer
and secretary;

3.    Constitution of the society which must contain name of the society, postal address
and objects of the society;

4.    Application form A and B each in duplicate signed by three officials.

·         Form A (application for registration of a society)

·         Form B ( notification of address and registered office of a society)

Registration of a society procedure

a.    Name search: A name search is conducted to determine whether proposed names
are available for registration.

b.    Preparation of the constitution and necessary forms: The society’s constitution is

prepared and Forms A and B are completed.

c.    Lodging of the documents for registration purposes: The duly filled forms and the
constitution are there after lodged with the registrar of societies together with the
prescribed fee.

d.    Issuance of a certificate: Once the application is approved a certificate of

registration of society is issued. If the application does not comply with the societies
rules a Notice of refusal is formally issued.

Chapter summary
This chapter presented the different types of business registrations in Kenya, their
requirements, their advantages and disadvantages. The objective of the chapter was to
help one know what it takes to register a business in Kenya.

Chapter review questions

1.        Distinguish between the THREE main forms of businesses that one can register
in Kenya.

2.        As a young graduate Kezzy has taste for beauty and has come up with a new
brand of her unique beauty products. Although she started as a sole proprietor in her
parents’ quarters, a business advisor has told her that she needs to register a limited
liability company. Justify this argument, yet explain why many people would still opt to
start with a sole proprietorship.

3.         Benta and Sam have disagreed on their partnership and they wish to dissolve it.
Explain the process of dissolving such a partnership and likely challenges that the two
may encounter.

4.        Raising funds through equity can save a business from high cost of capital. What
are the trade-off of this option as opposed to borrowing in relation to a limited liability
company?

5.        Discuss the requirements for setting up a limited liability company.

6.        Download a fill up a business registration form for a sole proprietor.

7.        How do you conduct a business name search in Kenya?

8.        Identify mandatory documents that a limited liability company must submit to

the Government every year.

9.        How does corporate tax differ from taxation in a sole proprietorship?

10.     Distinguish between general and limited partnerships.

generation and less than 16% make it to the third family businesses have produced
major brands in the world such as Toyota, VW, Ford, Samsung, BMW, and WalMart
among others. Walmart was started by Sam Walton family in 1962 and was listed as the
largest family business in 2015 with over US Dollars 485.7 billion turnover and 2.2
million employees (Ernest & Young, 2017). In 2015 the top 500 family businesses
generated 6.5 trillion USD sales, employed 21 million people and 44% of the firms are
owned by the 4th generation or older with the oldest firm being Takenaka Corporation,
was established in 1610 (Farrington, 2016). Family businesses are unique because the
family owners enjoy firm-specific knowledge that is passed from generation to
generation. Their shared social networks bring valuable social capital to younger
members of the family that enhances the firm’s future performance. Usually the focus
of the family team is the long-run therefore the family members make significant
current sacrifices for future gain as could non-family corporate managers. The
preservation of the firm’s reputation is central theme in a family business which results
in maintenance of high standards when it comes to honesty in business dealing, offering
quality and value to consumer. The fact that key employees in a family business are
related and trust one another eases on the management control challenges against
theft and destructive employees work habits.

Different Family Business Teams Combinations

Many combinations of family business teams are possible such as

  Wife Children (Son/Daughter) In-laws

(Mother)
Husband Husband & Father + Son or Daughter Father + In-laws
(Father) Wife or Children
Wife (Mother)   Mother + Son or Daughter Mother + In-laws
or Children
Siblings   Sons/Daughters + Siblings + In-laws
(Son/Daughter) Daughters/Sons) including (Cousins)
cousins
In-laws     In-laws + In-laws
 

a)    Husband–Wife Teams

This combination creates a strongly bonded team where each partner is able to
complement each other and operate under very high degree of mutual trust and
ownership. It gives opportunity for the couple to share more in each other’s lives.
However, business differences can interfere with family life, and work life leave little
time for family life. The Entrepreneur’s spousal communication is critical for their
performance.

b)    Sons and Daughters (Siblings)

When siblings come together to run a business they are likely to strengthen family bond
and leverage on blood ties to pool their personal resources and human capital. Sibling
cooperation and sibling rivalry has been common especially as business dynamics
emerge and the level of commitment or contribution becomes unequal. The best case
has siblings working as a team, each contributing services according to his or her
abilities but worst cases involve siblings competing as rivals and disagree about their
business roles to eventually breakup and run separate business outfits.

c)    In-laws In  Business

In laws in business is the most challenging family business because can easily escalate
to nuclear family conflicts of interest. Disagreements about how to treat and reward in-
laws and family members/children are always a thorn in the flesh. If possible in-laws
should be assigned to different branches or to different business roles.

Advantages of family business

1.       Strength of family relationships during challenging periods of business change

2.       Financial sacrifices that family members make for the good of the firm

3.       Operation as a family business distinguishes the firm from its competitors

4.       Higher levels of concern for its community and non-family employees

5.       Capability to plan and prepare for the long haul

6.       Emphasis on quality and value

7.       Family Business Momentum is easy to maintain by passing business between

generations

8.       The founder’s core values become a transmitted part of the culture (for better or
worse).

9.       Family Business Cultural Values such as (Mutual respect, Integrity, Wise use of
resources, and Personal responsibility) are easily propagated

10.     It is “fun” for family to work together. They get more time together and form
strong family bond.

Disadvantages of family business

1.     Family Conflict on roles and rewards are common
2.     Lack of structured governance and adhere to external corporate laws

3.     Nepotism and reluctance to let outsiders into the top tier positions hinder
professionalism

4.     Poor Succession Planning create long histories of in-fights and legal suits

5.     Lack of openness in management

Common Types of Conflicts in Family Business

1.    Parent – Children Rivalry    

2.    Rivalries between siblings     

3.    Conflict between other extended family members e.g. multiple wives inheritance

4.    Conflict between family and non-family members e.g. business trustees, estate
managers and lawyers   

Parents-Children Rivalry
This type of conflict occurs due to several factors that include:

1.    Founder’s Psychological strong sense of attachment and hence reluctance to give

up control and power

2.    Violation of social or economic pecking order such as elder Son/daughter not being
selected as a successor

3.    Unwillingness to delegate

4.    Feeling of unequal compensation for the hardest working family member.

5.    Using age rather than competence as a basis for promoting or compensating family
member.

6.    Differences in values, vision and management styles between the aging founder
and the children leads to increased tension

7.    The path to self-validation by a drive to equal or outdo father and a feeling that one
can measure up as equal or better to the father.

 
Rivalries between offspring 
Rivalries between off-springs where there is Favorite Son Syndrome - father playing off
offspring against one another

Son/daughter has a need for independence and grows impatient

Conflict between other members of the family

Extended family members may feel they have a stake as bona fide hires of the estate of
the founder e.g. multiple wives inheritance, grandchildren, parents of the founder, and
other relatives.

           

         

Conflict between family and non-family members

Conflict between family and non-family members may include stakeholders who feel
they need compensation for their contribution in the business such as long serving
employees, business trustees, estate managers and lawyers.

Causes of Conflict in the Family Business

1.    Ambiguity of roles

2.    Differences in power and status among family and non-family members

3.    Hasty and /or unfair succession process

4.    Rivalries among family members

5.    Favorite Son/daughter syndrome

6.    Lack of clear and coherent policies regarding career development, compensation

and hiring

7.    Lack of code of conduct

8.    Lack of proper job descriptions and clear boundaries

 
 

Mechanisms to Resolve Family Business Conflicts

1.    Succession planning including mentoring and fair distribution of wealth

2.    Third-party intervention (Peacemaker, Wise man/woman in the family,

Consultant/lawyer, accountant)

3.    As the family business head the father should allow off-springs to do his/her own
thing and make own choices

4.    Children should understand father’s feelings and respect social values

Conflict between other members of the family may be caused by:

1.    Lack of or unfair succession process

2.    Value differences between generations

3.    Ineffective communication

4.    Unclear definition of roles and responsibilities

5.    Undefined or poorly defined policies on division of labor, career development and

business procedures

Conflict between family and non-family members are also not uncommon. They can be
caused by:

1.    Nepotism and unfair treatment of non-family members

2.    Bossy children

3.    Non-consultation in decision-making with senior non family members

4.    Undefined or poorly defined policies on division of labor, career development and

business procedures

Mechanisms to resolve family business conflicts include:

1.    There should be clear job descriptions where each family member knows his or her
role. It should give clear jurisdiction, compensation, career development, code of
conduct, objectives, performance assessment criteria

2.    Have intervening confrontation resolution meeting and the family leader or chief
executive officer should play mediating role. Open communications including face-to-
face meetings, one-on-one meetings with CEO/Founder and employees involved in
conflict, and group meetings

3.    Create a family code of conduct for the business that distinguish family issues and
business and their conduct.

4.    Provide useful and open communication to family members such as in a weekly

dinner

5.    Introducing professional management and training among the family members so

that each feels valued and is able to realize their optimal input.

6.    Managing conflict promptly and professionally (breaking deadlocks, act early, The
founder or the president of the family business as chief arbiter should avoid enlisting
allies in conflict situations or taking sides in conflict situations, Allow expression of
feelings, Set aside time to resolve dispute and reduce tension, and develop appropriate
mechanisms/procedure for resolving conflict.

7.    Create a healthy business environment where merit is recognized and productivity

rewarded fairly without segregation.

8.    Involve non-family third party peacemaker/arbiter (lawyer, accountant, and family

friend)

9.    Reassignment of conflicting parties to other duties outside the line of duty of their
aggrieved partners.

Strategies for succession and family business continuity

In order to ensure continuity between generations, succession planning is very critical.
The founder may become incapacitated due to sickness, may retire or even die. It
should include:

1.    Role family may play in the succession of management

2.    Economic requirements for retirement and timing issues

3.    The professional role of the exiting family head: active or inactive

4.    Providing professional management of employees, customers and suppliers

5.    Allocating for financial requirements for dependent family members

Benefits of succession planning include:

1.    Smooth transition between generations

2.    Improved confidence with family, employees, customers and suppliers

3.    Commitment to future success due to reputable tradition of peaceful transition

4.    Happier work environment to employees and family

5.    More financial security to dependents and employees

6.    Improves customer loyalty of the business as a stable going concern

Founder exit strategies

1.    Sell company to competitor, third party buyer, or to the management team

2.    Create a family trust where trustees manage the estate on behalf of the family

3.    Gift shares to children or relatives in business to take up ownership

4.    Sell interest in the entity to operating partner or employees

5.    Liquidate the company and sell assets and distribute the wealth

6.    Do nothing – let heirs worry about it

Succession planning
Since transition is inevitable the owner needs to prepare for transition by:

1.    Develop competent management successors from among the family members

2.    Retain key employees for training and continuity with the new leadership

3.    Select time frame for transfer and make it gradual

4.    Communicate to employees, customers and suppliers of the impeding changes

5.    Transfers shares and ownership to children and/or relatives in a timely manner

6.    Review the contribution of each family member to your business including

dependency of non-working family members who are also entitled beneficiaries. 

7.    Establish an estate plan with a neutral party

8.    Determine tax and other liabilities to avoid external litigations

9.    Fund an effective business succession plan

Figure 7: Stages of succession planning

In the pre-business stage the child is made aware of some aspects of the firm or
industry through some formal orientation. Then during the introductory stage this child
is exposed to business jargon, employees in the business and the business environment
so as to make him or her familiar with the business activities and its settings. However,
it only in the next step of introductory functional that the child will work, so to say on
part-time basis gradually while learning few details of the firms operations. During
functional step the potential successor begins work as full time employee in some non-
managerial position. In the advanced functional the potential successor assumes
managerial position and ascends through management positions prior to becoming
president in the early succession where now the successor will exercise overall direction
but parent still in the background. In the mature succession the successor will becomes
the figure head of company and the outgoing head formally exits from active role in the
firm. In some cases mature succession does not occur until the predecessor dies or is
legally incapacitated. The transfer of ownership then passing to the next generation.

Chapter summary
This chapter focused on family business phenomenon and evaluated factors that
support it and those that affect it.

Chapter review questions

1.          Define the term family business and state FOUR different types of family
businesses.

2.            Family businesses have many advantages although disadvantages are also

inevitable. Evaluate this statement.

3.            Toyota, VW, Ford, Samsung, BMW, and WalMart are some of major family
brands in the world. What distinguishes such family businesses and helps them survive
many generations?

4.            Family business conflicts can occur in several types. Explain.

5.            What are the major causes of conflicts in a family business?

6.            Identify mechanisms for resolving family business conflicts.

7.            Define the term succession planning and identify strategies for succession
planning in family businesses.

8.            Mbugua enterprises limited proprietor has decide to commence on succession

process. Advise him on the steps to carryout.

9.            What exit strategies would one consider for leaving a family business which he
or she founded.

10.         Your brother has not been committed like you in your family business yet he is
the firstborn but now demands an equal share if not larger in your father’s businesses.
What is your view on this?