Worried about tax? Here's what to consider when registering a business

Dear Dr. Pesa,

I’m a young person currently employed but thinking of starting a business with a friend. I have sought advice widely on the type of business structure to adopt. Should we just register a business name and start operations or forming a company. Most of my friends have advised me to just register a business name and not form a company since I will be bowed down with many tax requirements. Is it true that I will be required to meet strict and lengthy tax requirements if I operate the business as a company? What are some of the disadvantages of operating a business as a company with regard to taxes? Is it true that if I form a company, the financial statements must be audited by qualified accountants?

Dear potential business owner,

It's great that you are looking to start your own business, and I commend you for seeking help with these questions. Some businesses have been destroyed for lack of understanding.

In recent times due to itax it has become a lot easier to file taxes for both personal and companies compared to when it was done manually, therefore the lengthy tax requirements are not there anymore.

When registering a business name, you either have the option of registering as a sole proprietor or as a partnership. Since you want to start with a friend the most suitable would be a partnership. There are no tax differences between sole proprietor and partnership.

To start with there are both pros and cons of operating a business as a partnership or as a company. When you register as a partnership you don't just enjoy limited liability as a company would. However, a few years back Kenya introduced Limited Liability Partnership (LLP) where partners have limited liability just as a company would and it has a separate legal status from the partners.

The partnership

1. It is very easy and cheap to start with minimum registration charges.

2.The business is taxed on the PAYE scales which has bands of income and tax on income is charged progressively. There is also personal relief of Sh 1,408 per month.

3. A partnership is not recognized as a separate legal entity from its partners/ shareholder.

Monthly Bands of Taxable Income (KES)          Tax Rate

On the next 11,587                                                  15 percent

On the next 11,587                                                  20 percent

On the next 11,587                                                  25 percent

Over 47,059                                                             30 per cent

The company

The main distinction of operating as a company compared to a partnership is by 3 major principles:

1)  Legal personality – A company is a separate entity from its owners it has its own separate legal personality and thus has rights similar to human beings.

2) Limited liability – A company’s members/shareholders are not responsible to pay off the company debts from their personal assets since legally they are not their debts whilst in a partnership, the partners would be personally liable for the debts of the business and could lose personal property in settling the debts. This is subject to court rulings.

3) Death, bankruptcy, or insanity of one of the shareholders of the company does not constitute to termination of the company’s existence whereas the death, bankruptcy or insanity of a partner would normally lead to termination of the partnership unless if the partnership agreement states otherwise.

Taxation in companies is based on a flat 30 percent corporation tax on all business profits of the year. 

Yes, it’s true for companies after the end of the financial year their financial statements must be audited by a practicing auditor certified by ICPAK. This is not the case if operating as a partnership. However, partnerships must also obtain an accountant’s report by a qualified accountant. Audited accounts requirements are subject to 50 million thresholds as specified in the company’s Act, 2015.

For VAT purposes, both the company and partnership shall have to register if they meet the required threshold of 5 million. The partnership PIN is the one used for VAT registration. However, the individual partners shall be held accountable in case of a default. Other taxes which apply to all businesses also include Withholding Tax (WHT) and Personal Income Tax (PIT).

Dr Pesa - Mohsin Adamjee ( ACCA, CPA (K) , Masters in Professional Accountancy )

Partner at Audit Plus Chartered Accountants  (Suite 28, The Stables Office Park, Karen)