Sole Trader Overview and Challenges

Sole Trader

• A sole trader enjoys all the profit from their business, potentially motivating them to work harder.
• Sole traders bear all the losses themselves, encouraging them to avoid mistakes.
• Direct contact with customers and employees fosters a better understanding of their needs, potentially leading to improved services and business success.

Disadvantages of Sole Traders

• Sole traders have unlimited liability, meaning they can be held personally responsible for all business debts.
• Sole traders often struggle to secure sufficient capital, relying heavily on their own resources.
• Attracting and retaining highly skilled employees can be challenging due to limited resources and profit-sharing opportunities.
• Lack of continuity: The business may cease to exist if the sole trader becomes bankrupt, dies, or is unable to manage the operation.
• Sole traders often lack specialized skills and training, often working long hours which can negatively impact performance.

Formation and Dissolution of a Sole Trader

• Registration is required with the Registrar of Business Names at the Attorney General's Office.
• They obtain licenses from local authorities.
• Dissolution does not require any formal procedure.

Partnership

• A partnership involves two to twenty individuals working together toward a common goal, usually profit maximization.
• Each partner generally has unlimited liability for business debts.

Types of Partners

• Nominal Partner: Contributes no capital or involvement in management, but shares in profits and liabilities.
• Minor Partner: A partner under the age of eighteen, with liability limited to their capital contribution. Their liability becomes unlimited upon reaching the statutory majority age.

Deed of Partnership

• The Kenya Partnership Act of 1963 governs partnership terms, but can be overridden by a Deed of Agreement.
• The deed outlines the following terms and conditions of the partnership:
  • Name and purpose of the business
  • Business location and commencement date
  • Partner names, addresses, and occupations
  • Partner status (e.g., limited, general, active, dominant, minor, quasi)
  • Capital contributions and ratios
  • Interest rates on capital (if applicable)
  • Partner remuneration
  • Profit and loss sharing arrangements
  • Allowable annual drawings
  • Duties and rights of each partner
  • Admission, withdrawal, and expulsion of partners

Advantages of Partnerships

• Ease of formation: A simple agreement between partners is sufficient, and formal legal requirements are minimal.
• Additional capital sources: Partnerships can raise more capital than sole proprietorships, leveraging the financial contributions of multiple individuals.
• Broader management base: Partners can leverage specialized skills and expertise in different areas of the business, improving overall management.
• Ease of expansion: Partnerships can expand easily by adding new partners with specialized skills.
• Sharing of losses and liabilities: Risk is spread across multiple partners, reducing the burden on any single individual.
• Duration: Partnerships tend to have longer lifespans than sole proprietorships as the death or retirement of one partner does not necessarily dissolve the partnership, especially with multiple partners or provisions for continuity.

Disadvantages of Partnerships

• Unlimited liability: General partners have unlimited liability for business debts.
• Difficulty in making decisions: Authority is divided among partners, potentially leading to delays and difficulty reaching consensus.
• Lack of continuity: Partnerships face uncertainty due to potential disagreements, death, or incapacitation of partners.
• Sharing of profits: Profit sharing can limit the direct financial benefits of individual efforts, especially when contributions are unequal.
• Frozen investment: Partners may find it difficult to withdraw their investments unless specifically agreed upon.
• Limited access to capital: Partnerships may struggle to secure significant capital, especially for long-term financing projects.

Dissolution of Partnership

• A partnership can be dissolved due to various circumstances:
  • Agreement: When the partners mutually agree to dissolve the partnership
  • Expiry: When the partnership's agreed-upon duration expires
  • Death: When a partner dies
  • Insolvency: If the partnership becomes bankrupt
  • Illegality: If the partnership's activities become illegal

Types of Companies

• Registered Companies: Established, registered, and operate under the Companies Act of 1962. These are the most prevalent type.
• Statutory Companies: Created by an Act of Parliament. Their powers and functions are defined by the creating Act. Many government-owned companies (parastatals) such as AFC, ICDC, and KNTC fall under this category.

Formation of a Company

• To form a joint stock company, the following documents must be submitted to the Registrar of Companies:
  • Memorandum of Association
  • Articles of Association (or adoption of model Articles, termed Table A in the Act)
  • List of directors with details of their names, addresses, occupations, subscribed shares, and agreement to serve as directors
  • A statement signed by the directors confirming their agreement to act as such
  • A declaration that all registration requirements have been met, signed by the company secretary, a director, or a promoter.
• Upon approval, the Registrar of Companies may require the promoters to pay registration fees.
• After payment, the company receives a Certificate of Incorporation, granting it legal entity status.

The Memorandum of Association

• The most crucial document defining the company's powers and limitations. It governs relationships with external parties.
• It consists of six clauses:
  • Name Clause: States the company name ending in "Limited".
  • Situation Clause: Defines the company's domicile, i.e., the location of the registered office.
  • Object Clause: Outlines the company's aims, objectives, and purposes.
  • Capital Clause: Specifies the company's desired share capital.
  • Liability Clause: States that shareholder liability is limited.
  • Declaration Clause: Affirms the promoters' intention to form a limited company.

Articles of Association

• Establishes internal company rules and regulations:
  • Defines different share types and their associated rights and powers.
  • Outlines share transfer procedures.
  • Specifies loan capital types, rights, powers, and transfer procedures.
  • Details types of meetings, procedures for calling and conducting them.
  • Addresses director details, including numbers, election/appointment, qualifications, disqualifications, powers, duties, and liabilities in management.
  • Describes company secretary appointment, remuneration, powers, duties, and responsibilities.
  • Outlines procedures for maintaining share and loan registers, meeting records, accounting, and auditing.
  • Governs the declaration and distribution of dividends on share capital and interest on loan capital
  • Establishes rules for auditor appointments.

Advantages of Companies

• Limited liability: Shareholders are legally protected from losing more than their investment value, even if the company is unable to meet its debts.
• Transferability of Ownership: Shareholders in public limited companies can easily sell their shares to other individuals.
• Continuous existence: A company's legal existence is unaffected by the death of shareholders, unlike sole proprietorships and partnerships.