Forms of Business

Ownership

A presentation by:
Edward Gura

6/16/2019 1
Sole proprietorships
• Sole proprietorship means a business owned, financed and controlled by a single person
who is recipient of all profit and bearer of all risks. It is SUITABLE IN AREAS OF PERSONALISED
SERVICE like beauty parlor, hair cutting saloons & small scale activities like retail shops.
Features
1. Single ownership: It is wholly owned by one individual.
2. Control: Sole proprietor has full power of decision making.
3. No separate legal entity: Legally there is no difference between business& businessmen.
4. Unlimited liability: The liability of owner is unlimited. In case the assets of business are not
sufficient to meet its debts, the personal property of owner can be used for paying debts
5. No legal formalities: Not required to start, manage and dissolve such business organization.
6. Sole risk bearer and profit recipient: He bears the complete risk and there is no body to
share profit/loss with him.
6/16/2019 2
Cont.
Merits
1.Easy to start and close: It can be easily started and closed without any legal formalities.
2. Quick decision making: As sole trader is not required to consult or inform anybody about his decisions.
3. Sense of accomplishment: There is a sense of personal satisfaction.
4. Unlimited liability: The liability of owner is unlimited. In case the assets of business are not sufficient to
meet its debts, the personal property of owner can be used for paying debts, this motivates the sole trader to
work harder.
5. No legal formalities: are required to start, manage and dissolve such business organization.
6. Sole profit recipient: There is no body to share profit
LIMITATIONS
1. Limited financial resources: Funds are limited to the owner’s personal savings and his borrowing capacity.
2. Limited Managerial ability: Sole trader can’t be good in all aspects of business and he can’t afford to
employ experts also.
3. Unlimited liability: Of course, sole trader compels him to avoid risky and bold business decisions.
4. Uncertain life: Death, insolvency, lunacy or illness of a proprietor affects the business and can lead to its
closure.
5. Limited scope for expansion:- Due to limited capital and managerial skills, it cannot expand to a large scale.
6/16/2019 3
Cont.
Sole proprietorship is suitable-
• Where the personal attention to customer is required as in tailoring,
beauty parlor.
• Where goods are unstandardized like artistic jewelry.
• Where modest capital is required
• Where limited managerial skills are required as in case of retail store
• Business where risk is not extensive i.e. lesser fluctuation in price and
demand i.e. stationery shop.

6/16/2019 4
Cont.
Formation process
Procedure for registering a sole proprietorship in Kenya
• A unique business name: during the registration process, the authorities will do a business name
search. Therefore, your business name has to be unique and not an imitation of another business name.
• You will be required to state the nature of your business clearly. This nature has to be specific.
• Your business must also have a specific address and contacts. This will also involve having a registered
postal address and the name of the business owner.
• Owner details: Details about the business owner must be included are: nationality, age, gender, the
location of residence, copy of identification documents, additional business occupation, passport
photos, copies of KRA pin certificates and signed B2N forms.
Cost of registering a sole proprietorship in Kenya
• The business name search process will cost you Kshs 100,
• Registering fee is Kshs 800. Payable at Sheria House upon submission of filled B2N forms.
n/b- After seven days, you will be required to go back and check if your business registration certificate is
ready. Once you collect your registration certificate, you will be ready to start operating your business
legally in Kenya.
6/16/2019 5
Partnerships in Kenya

6/16/2019 6
Cont.
Meaning
Partnership is defined by S.3 (1) of the Partnership Act as "the relation which subsists
between persons carrying on a business in common with a view of profit". The persons
who join hands are individually known as ‘Partners’ and collectively a ‘Firm‘ or
‘Partnership’.
Elements of a Partnership
1. Presence of a Business: this may include trade, occupation or professional practice
with commercial enterprising, where services or goods are sold for profit.
2. Carried out in common: Each partner is allowed to participate in the management
by law.
3. Sharing of profit/loss: There must be an objective of making profit. Social clubs are
not partnerships even though there is businesses carried out in common.
4. A partnership is an association of persons: Consists of between two persons and 20
persons
6/16/2019 7
Cont.

Although the sharing of profits is evidence of existence of a

partnership, the following situations do not constitute a partnership:

i) Co-ownership of property
ii) An employee receiving a salary from the profits of the firm
iii) A lender being paid interest on the loan from the profits of the firm
iv) A widow or widower of a deceased partner being paid the
deceased’s share from the profits of the firm.
v) A creditor being paid his debts out of the profits of the firm.

6/16/2019 8
 Formation of a partnership

6/16/2019 9
Formation cont.
Formation of a partnership
The formation of a partnership is not subject to any legal formalities, the agreement between the
parties may be:-
a) Oral or by word of mouth.
b) Written agreement
c) Implication from conduct of the parties.
Partnership Agreement
The partners may on their own accord reduce the basis of their relationship into a formal
document detailing the terms and the condition of the association. The document is the
Partnership Deed or Agreement. It is not a legal requirement.
Contents of a partnership deed/agreement
a. Names of partners
b. The firm’s name
c. The nature of business,
d. Place of business
e. The date on which the partnership is to commence and the period of its duration if any
6/16/2019 10
Formation cont.

f. The capital contribution by partners

g. The interest to be paid on loans advanced by the partners to the firm
h. The bank account and who is to sign the cheques
I. The profit and loss sharing ratios
j. How to share the management
k. How accounts will be kept and the provision for auditing accounts
l. The provision as to whether the firm will continue in business after
the retirement, death, or insolvency of a partner
m. Arbitration clause- this provides for the resolution of future disputes
between the partners through arbitration.

6/16/2019 11
Formation cont.
Rules /Principles Applicable In The Absence Of A Partnership Deed
The rules applicable are contained in Section 28 and 29 of the Partnership Act.
1. Profit and loss are shared equally
2. If a partner incurs liability while discharging the firm’s obligations he is
entitled to indemnity.
3. If a partner lends money to the firm, he is entitled to interest on the
principal at the rate of 6% per annum
4. A partnership can only change its business with consent of all partners
5. A person can only be admitted as partner with consent of all existing
partners.
6. A partner is not entitled to interest on capital before the ascertainment of
profit.

6/16/2019 12
Formation cont.
7. Every partner is entitled to take part in the management of the firm’s
business.
8. A partner is not entitled to remuneration for taking part in the
management of the firms business.
9. The books of account of the firm must be accessible to all parties
10. Under section 29 of the Act, a partner can only be expelled from
the firm if the power to do so is expressly vested another partners.

6/16/2019 13
Types of partners and Partnerships

6/16/2019 14
Rights of partners
• Rights of partners
• The rights and liabilities of partners are primarily governed by their partnership deed but if this is silent on any
particular matter reference is to be made to Sec 24 of the Partnership Act which lays down the following rights
between partners:
• a. All partners are equal must share profits or losses equally.
• b. A partner is entitled to indemnity for any payment made or liability incurred in the ordinary and proper
conduct of the firm’s business.
• c. A partner is entitled to interest of 6% per annum on any money lent to the firm apart from the original
capital subscribed at formation.
• d. Every partner is entitled to participate in the management of the firm.
• e. Each partner is entitled to oppose introduction of new partners.
• f. Each partner is entitled to have access to the firm’s books and other documents.
• g. On dissolution every partner has an equitable lien over the firm’s assets to ensure that they are used to pay
debts of the firm.
• h. On dissolution, after payment of debts every partner is entitled:-
• - To repayment of any loan made by him to the firm.
• - Payment of capital put to the firm.
• - To share in the residue in the same proportion as share in profit.

6/16/2019 15
Duties of a Partner

1. To render true accounts

2. Not to take any secret profit
3. Not to compete with the business of the firm
4. Use their knowledge and skills for the benefit of the firm.
5. To share in the losses.
6. To act within authority(actual or implied).
7. To act diligently.
8. Duty to actin good faith.

6/16/2019 16
Advantages
1. Specialization and division of powers: Where the association is
profession oriented.
• 2. Sharing of management: All partners are entitled to take part in the
firm’s management.
• 3. Wide capital base: this will assist in pooling together working and
investment capital.
• 4. Easy to form: Formation is not subject to many legal formalities.
• 5. Flexibility: Partners are free to change the nature of business,
provided all agree.
• 6. Sharing of Losses: Losses and Liabilities are shared amongst the
partners thereby cushioning the detriment.

6/16/2019 17
Disadvantages
1. Unlimited Liabilities
2. Sharing of profits
3. A single partner’s mistake affects all partners.
4. Disagreements between partners often delay decision-making.
5. Tends to rely on a single partners effort to manage.
6. Death, bankruptcy, or insanity of a partner may lead to dissolution.

6/16/2019 18
Dissolution of a Partnership
Dissolution without a court order
1. Mutual agreement of partners. This may be at any time just like the
formation.
2. Expiry of fixed time (if any) if the partnership was created for a fixed
term.
3. Completion of venture for which the partnership was created.
4. Notice- Any partner may give notice to others of his intention to
dissolve.
5. Death, bankruptcy of one – (if the deed does not provide otherwise).
6. Exercise of option (a partner may pledge his shares for payment of
personal debts).
7. Illegality – Event occurring to make the partnership business illegal.
6/16/2019 19
Dissolution cont.
Dissolution by court order
Any interested party may apply to court for dissolution of a partnership
in the following circumstances:-
1. When a partner becomes of unsound mind.
2. When a partner becomes permanently incapable of performing his
part of the contract.
3. When a partner is guilty of a conduct calculated to affect prejudicially
the carrying out of the business.
4. When a partner willfully commits a breach of partnership agreement.
5. If the partnership business is being carried out at a loss.
6. If the court thinks fit and just to dissolve e.g deadlock in management

6/16/2019 20
COMPANY ORGANIZATION

6/16/2019 21
INTRODUCTCION
Kenya does not define the term Company in testament to the words of
Buckley J in Re: Stanley (1906) “The word company has no strict legal
meaning”
• However, section 3 (1) of the Companies Act Cap 486 provides that a
company refers to:
“A company formed and registered under this Act or an existing
company;”
• This definition fails to identify the attributes of the company as it only
describes a registered company i.e. a company incorporated by
registration.
• A company may also be defined as an association of many persons who
contribute money or money’s worth to a common stock and who employ
it to a common purpose.
6/16/2019 22
Cont.
The Foundation of Company Law is based on two fundamental principles.
i. Legal or corporate personality.
ii. Theory of limited liability.
• Legal or Corporate personality
This principle means, when a company is registered it becomes a legal person separate and distinct from its
members and managers. It acquires an independent existence with certain capacities and subject to
incapacities. This principle was first formulated in the House of Lords in the matter of Salomon V Salomon Co
Ltd., where Lord Mc Naughton was emphatic that the company is at law a different person altogether from the
subscribers to its memorandum.
This principle is now contained in the Companies Act which provides inter alia”
“From the date of incorporation mentioned in the certificate of incorporation, the subscribers to the
memorandum together with such other persons as may be members from time to time, shall be a body
corporate by the name contained in the memorandum capable of exercising all the functions of an
incorporated company with perpetual succession and a common seal.”
• Limited Liability
Liability refers to the extent to which a person may be called upon to contribute to the assets of a company
and in the event of its being wound up.
The liability of a company may be limited or unlimited. It may be limited by shares or by guarantee.

6/16/2019 23
Types of Companies
1. Corporations Sole.
This is a legally established office distinct from the holder and can only be
occupied by one person after which he is succeeded by another. It is a legal
person in its own right with limited liability, perpetual succession, capacity
to contract, own property and sue or be sued eg The Office of the public
trustee and the Office of the Permanent Secretary to the Treasury.

2. Registered Corporations(private or Public)

These are corporations created in accordance with the provisions of
Companies Act.
i. Companies Limited by Shares
ii. Companies Limited by Guarantee
6/16/2019 24
Cont.

3. Statutory Corporations
These are corporations created by Acts of Parliament or an order of the
President in accordance with the provisions of Section 3 (1) of the State
Corporations Act (Cap 446).

A state corporation is a legal person with perpetual succession. In case of a

corporation created by an Act of Parliament, the Act gives it a name,
management structure and prescribes the objects. E.g. Kenya Wildlife Services,
Agricultural Finance Corporation, Public Universities, Central Bank etc.

4. Chartered Corporations
These are corporations created by a charter granted by the relevant authority.
E.g. Private Universities are chartered corporations under the Universities Act,
Chapter 210 Laws of Kenya.
6/16/2019 25
Formation
Preliminaries
Factors to consider and to be ascertained before a company is formed.
1. The name of the company.
2. Public or private company.
Promoters must determine whether the company they intend to form is public of private.
Private companies are identified under section 30(1) of the Companies Act which provides that a private
company is a company which, by its Articles of association,
• Limits the number of members to 50 excluding current and former employees who are members.
• Restricts the rights to transfer its shares.
• Prohibits any invitation to the public to subscribe for its shares or debentures.
Other characteristics of a private company are that;
a. It must have at least one director.
b. It must also have at least 1 member.
c. It is entitled to commence business from the date of incorporation.
d. It is not required to publish accounts or held statutory meetings.
e. It is empowered to give loans to its directors.

6/16/2019 26
cont

Public company:
a. Must have a minimum of 7 members.
b. Must have at least 2 directors.
c. Its shares must be freely transferable.
d. It must hold a statutory meeting (AGM)
e. It requires a certificate of trading to commence business
f. If quoted it must publish its annual accounts.
g. It may not give loans to its directors.

6/16/2019 27
THE FORMAL PROCEDURE OF COMPANY FORMATION

• A person wishing to incorporate a company should lodge with the Registrar

the following documents:
1. Application and reservation of name. This can be done at any Huduma
Centers or online using the E-Citizen platform or a Safaricom mobile phone by
dialing *271#.
2. Form CR 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.
N/B- The form combines the application for company registration, KRA PIN, NHIF, and
NSSF registration.

6/16/2019 28
CONT.

3.(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).

6/16/2019 29
Documents attached

7. Applicants should attach copies of identification documents.

For Kenyan Citizens attach copies of:
-Identification Card (ID)
-Personal Identification Number certificate (PIN)
-Passport size photo (coloured)
For Non Kenyans (Foreigners) attach copies of:
-Passport pages with bio data
-Passport size photo (coloured )

6/16/2019 30
Cont.
• Stamp Duty
Company registration documents have been exempted from stamp duty eliminating the
requirement for stamp duty assessment and franking.
• Registration fees
The registration fee is ksh.10, 000 for all companies regardless of the Nominal Share Capital.
• Articles of association
The Companies (General) Regulations, 2015 provide in schedule 3, 4 and 5 model Articles which
companies may adopt. Where applicants adopt the model Articles they do not need to supply them
during registration.
If the applicants do not adopt such Articles, then they have to provide their own Articles.
• Company director
Section 128 of the Companies Act provides that a private company is required to have at least one
director.
A public company is required to have at least two directors.
A company is required to have at least one director who is a natural person.

6/16/2019 31
Cont.

• Company secretary
Optional for Private companies with a share capital of less than 5 million shillings. However
all public companies must have a secretary.
• Presentation of documents
• Under section 15 of the Act, the constitutive and other documents must be presented to
the Registrar for registration of the company.
• The Registrar must satisfy himself that the documents have been prepared in accordance
with the provision of companies Act Cap486.
• Registration and issue of certificate of incorporation
The Registrar registers the memorandum and issues a certificate of incorporation under his
hand thereby certifying that the company is duly incorporated.
The company comes into existence on the date mentioned in the certificate of incorporation.
• The company seal is formally prepared after the Certificate of incorporation has been issued

6/16/2019 32
 END

6/16/2019 33