Small and medium enterprises (SMEs) are an integral part of our society and our future as a nation. However, many SMEs are not meeting statutory obligations due to lack of knowledge.
Most entrepreneurs start businesses as proprietorships or partnerships but as the businesses scale up, the pressure to transform them into limited companies increases. This pressure is mainly as a result of financiers’ and other business stakeholders’ preference to deal with a legal entity as opposed to an individual.
Upon receipt of the revered registration certificate from the Registrar of Companies, many entrepreneurs tend to file it or frame it at their reception — without giving much thought to the statutory obligations to maintain that legal status.
Much of this problem stems from the fact that this information is not relayed at the time of registration which then explains the large number of ‘inactive’ accounts at the companies’ registry. It is also no wonder that the level of statutory compliance is still low despite the numerous threats by the registrar to deregister these seemingly ‘inactive’ accounts.
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I will explore the statutory obligations of a limited company in this article.
Every company is required to hold a general meeting called the statutory meeting within three months from the date at which the company commenced business.
The meeting should table: the Memorandum and Articles of the company that have been adopted; the total number of shares allotted; the details of the allottees; the total amount of cash received in respect of the shares allotted; the details of the directors, secretary and auditors (if any); and details of the registered office.
Every company is also required to hold an Annual General Meeting (AGM) every year during which properly maintained books of account should be presented to the shareholders. The accounts and auditors’ report must also be annexed to the balance sheet. The mandatory items that should be discussed at the meeting and included in the agenda include; the approval of audited financial statements; the election of directors; the approval of directors’ remuneration; and the setting of the auditors’ remuneration.
If a company is not trading, the AGM should note the dormant status of the company as there will be no financial statements to table.
Should the shareholders decide not to hold the AGM, they are given an option to sign a circular resolution in lieu of the Annual General meeting if provided in their Articles of Association. It is important to include all matters that need be discussed at an Annual General meeting in this resolution.
Each Company, trading or dormant is required to file an annual return with the Registrar of Companies 14 days after holding the AGM or on the effective date of the signed circular resolution. This should include details on the situation of registered office, register of members and debenture holders; particulars of indebtedness in respect of all mortgages and charges (to be registered with the Registrar of Companies); a list of past and present members who have held shares since the previous annual return and particulars of directors and secretaries. The first annual returns should be filed 18 months from the date of incorporation and within 12 months thereafter.
Any company trading or non-trading is required to file an annual tax return, with this being a nil return where the company is non-trading. All companies are also required to obtain a personal identication and VAT registration subject to certain conditions. A trading company may require the services of their professional financial advisor to complete a tax return and to choose the most tax efficient structure for their business.
In order to ensure that the registrar of companies has an updated status of your company, we are required to report certain changes to them. Changes in the directorship and company secretary are at the top of the list. Any changes in shares, which include share transfers or allotment should be properly documented through resolutions and the necessary registration instruments executed, stamped and filed as required under the law.
Another importance of the filings is that they will be regarded as the legal evidence for any such transaction. Changes relating to shareholding should always be legally formalised to avoid wrangles which are common with ownership.
All companies are required to maintain the following statutory records which comprise of the register of members and directors, minute book, share certificate book, company seal, secretarial file — containing the Certificate of Incorporation, a stamped copy of the Memorandum and Articles of Association, copies of all incorporation returns filed with the Registrar of Companies and all returns filed with the Registrar of Companies.
Many of these requirements may seem cumbersome but are part and parcel of running a business. In order to ensure that these are met without much ‘hassle’ for the owner, it is recommended to have these documents maintained by a qualified and registered company secretary on their behalf.
Jumba is a manager, company secretarial department, Deloitte Kenya.
The views expressed in this article are the author’s and not necessarily those of Deloitte Kenya.