How to choose the best business type for your startup

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The entrepreneurship bug has finally bitten you and you would like to start you own kabiashara either to become your own boss or as a side hustle. Problem is you are unsure which business type suits you. Here is an overview of the various business types that can help you make a decision on which to choose.

Sole Proprietorship

This business structure is owned and operated by one person. In most cases, it is usually a business structure for small and medium-sized enterprises (SMEs). It is great if you want to work alone. It is also the cheapest and simplest business entity to register.

Pros

  • It’s cheap and fast to register.
  • A sole proprietor has complete control and decision-making power over the business.
  • Sale or transfer can take place at the discretion of the sole proprietor.
  • No corporate tax payments and few formal business requirements.

Cons

  • You are personally liable for all your company’s liabilities. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company.
  • All responsibilities and business decisions fall on the shoulders of the sole proprietor.
  • Investors also don’t  usually invest in sole proprietorship due to the risks involved.

Cost

It costs Ksh 1,000 to register a sole proprietorship.

Partnership

A business or firm owned and run by two or more partners who have a common view of making the profit.

Pros

  • It is also affordable and fast to register. Partners share the company’s liabilities and profits.
  • Each partner brings in their own expertise so the chances of the business failing are minimized.
  • A Partnership does not pay tax on its income but passes through any profits or losses to the individual partners.

Cons

  • Similarly to a sole proprietorship, partners are liable for all damages and liabilities that the company incurs.

Cost

It costs Kshs 1,000 to register a partnership.

Limited Liability Partnership

A limited liability partnership is a special business structure that provides protection for individual partners against the negligence of other partners within the organization.

Pros:

  • Liability protection; This type of partnership structure protects individual partners “from personal liability for negligent acts of other partners or employees not under their direct control. It becomes an advantage when there is potential for lawsuits against the business.
  • Tax advantage; The partnership itself is not liable to pay any taxes but the partners themselves are the ones liable to pay personal income taxes. Taxes are paid according to each individual’s interest in the business.

Cons:

  • Individual partners are not obligated to consult with other members in certain business agreements. For the protection of the overall integrity of the company, create a partnership agreement that specifically outlines what each limited partner can and cannot do when making business decisions.

A Limited Liability Company

This is a corporate structure whereby the members of the company cannot be held personally liable for the company’s debts or liabilities. Limited  liability companies come in two forms that is public and private. Because both of these are separate entities from their owners, they must provide for corporate tax payments.

a. Public

Public corporations are those whose securities are traded publicly on the stock exchange, for example, Safaricom. These types of companies must be tightly regulated and must publicly disclose their true financial position so that investors can determine the worth of their stock.

Pros

  • There is Limited Liability for shareholders, hence the directors’ liabilities for the debts and obligations of the LLC are limited to their own investment in the case of bankruptcy or court proceedings.
  • The business is viewed as a separate legal entity as such it has perpetual succession, which means that the company will exist beyond the life of its members.
  • The company also has capabilities to raise large amounts of capital because there is no limit to how many shareholders it can have. These shares are freely transferable and provide liquidity for shareholders.

Cons

  • There are also more complex and restrictive rules governing the formation of a public company than sole traders have. In order to protect public investors, there are also various controls and regulations that the business must follow.
  • In the situation where a particular dispute or violation occurs, there is a possibility that the original owners can lose control of the public limited company.

b. Private

This is a privately held business which simply means their stock is not publicly traded. While a public entity promotes an unlimited number of shareholders, This type of business limits the number of shareholders to 50 and restricts shareholders from publicly trading shares.

Pros

  • Similar to public companies, private entities also enjoy limited liability and perpetual succession.
  • There is more flexibility in the management of affairs and conduct of business.
  • The number of directors in a private limited company is at least two.

Cons

  • Shares are not freely transferable , disallowing it from reaching heights many public companies do.
  • The number of members in any case cannot exceed 50, excluding employees.
  • Restriction placed on the sale of shares is a disadvantage because shareholders have limited options for liquidating shares.

Cost

It costs Ksh 10,650 to register a limited liability company.

1 COMMENT

  1. Well thank you very much for this issue of enterprise
    On my entrepreneurship am looking for an investor who is willingly to partnership my hot business which I have operated 10years since I started,the main challenge I pass through is financial solutions and raw material since it is minority business the demand is very high than the supply well I categorize it lifestyle so if by any chance you can get me back quickly and we can make good progress and on the other side we create employment and services through marketing welcome
    . Mr Felix

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