Elements of Private Companies in Kenya

Introduction

Private companies are popular vehicles for carrying on business in Kenya.  Private company registration  is carried out through an online platform known as e-Citizen (accessible here). It takes up-to five days from the date of submission of all requisite information to obtain a certificate of incorporation.

This Article examines the key elements of a private company and the benefits derived from operating a private company.

What is a Private Company?

There are certain attributes that distinguish private companies. These include:-

a) separate personality and limited liability

Private companies have  separate legal identities and legal rights from their owners.  Therefore, a company has the right to own and dispose property, file or defend lawsuits and enter into contracts in its own name. In addition, the owners enjoy limited liability for the company’s debts. This simply means that in the event that the company is unable to pay its debts, the owners are only liable to the extent of their paid or unpaid shares. Consequently, the company’s debtors cannot pursue the owners’ personal assets to satisfy these debts.

b) restrictions on share transfers and share subscriptions

Private companies restrict owners from transferring their shares or ownership. If an owner wants to sell his shares, he must follow the processes  set out in the company’s constitution. Further, these companies  prohibit invitations to the public to subscribe for shares or debentures.

c) restrictions on number of owners

The maximum number of owners in a private company is fifty (50).

d) incorporation certificate

The company’s certificate of incorporation identifies it is a private company. Additionally, the company name that appears on the certificate ends with the word “limited“.

Key Elements of  Private Companies

1. Articles of Association

This is the main constitutional and governance document for companies. It covers two main aspects of governance:

(i)  share ownership and share dealing rights –  some of the matters outlined here include types of shares issued by the company, transfer and allotment of shares,shareholder voting rights and procedures for annual company meetings.

(ii) duties and responsibilities of directors – includes appointment and resignation of directors as well as powers and duties of directors.

A company may define its own Articles or use model Articles provided by the Registrar of Companies.

2. Shares and Share Capital

A share is a unit of ownership in a company whilst share capital is the total value of the different shares issued to shareholders.

For example, A and B can set up a company and decide to each invest Kes. 1,000 as share capital. The company will issue 2,000 ordinary shares valued at Kes. 1 to each of the shareholders. This means the share capital of the company will be Kes. 2,000 divided into 2,000 shares of Kes. 1 each.

The shareholders and share capital share are usually determined at the point of formation of the company. Nonetheless, changes may be made after incorporation in which case, information on shareholders and share capital can be obtained from the company’ Annual Return or CR 12 form.

3. Shareholders

These are the owners of company shares . Shareholders can be either individuals or  corporate bodies.

Shareholders are hardly responsible for the daily operations of a company. However,  there are certain decisions that can only be taken by shareholders. Examples include decisions on change of the company name, appointment and removal of directors or alteration of company’s Articles of Association.

In addition to decision-making rights, shareholders have the right to attend and vote at general meetings, receive dividends as well as copies of the company’s annual financial statements.

4. Board of Directors

The Board of Directors is responsible for the strategic and operational decisions of the company. The Board operates through board meetings and board committees. Further, the Board appoints and supervises of the company’s management team who are responsible for daily operations of the company.

Under the companies Act, directors have various duties such as acting within their powers, promoting the success of the company, exercising independent judgement, exercising reasonable care, skill and diligence, avoiding conflict of interests and declaring interests in proposed or existing transactions with the company.

Where directors fail to act within their powers, they may be exposed to law suits, fines and criminal action.

What are the Benefits of a Private Company?

(i) Shareholder Protection – The most common benefit derived from private companies is limitation of liability for shareholders. This is because shareholders have assurance that if the company fails to meet its debt obligations, their personal assets cannot be used to repay the debts.

(ii) Credibility – a limited company also gives stakeholders such as suppliers, employees, customers confidence that the business is a going concern. Additionally, depending on the risk  involved,  some clients prefer to award high-value contracts solely to incorporated companies. Incorporation offers some competitive advantage for such opportunities.

(iii) Professional Status – a business that is operated through a private company is generally held in high regard. This is because  incorporated entities have rigorous compliance requirements. For instance, they must adhere to complex accounting  standards and submit their corporate records and accounts to the companies registry where they can be inspected by the public.

As a result,  private companies can attract investors such as private equity firms by selling shares in exchange for investment. They are  also able to attract lending opportunities as financiers prefer to deal with incorporated entities when extending loans or similar facilities.

(iv) Unlimited lifespan –  companies have an unlimited lifespan in that  the death of a shareholder does not affect its continued existence.

(v) Protection of the Company Name – company names are safeguarded through the company registration. The automation of the registration process through introduction of e-Citizen has significantly reduced the risk of businesses registering names similar to those of existing companies. Therefore businesses can confidently create a valuable and trusted brand identity without worrying about brand identity theft.

Conclusion

Businesses in Kenya prefer to trade as private companies for various reasons. Firstly, the  automation of the registration process has made it pretty fast and simple to incorporate. Secondly, companies give  businesses credibility and a professional outlook. Thirdly, the shareholders enjoy limited liability and protection of their personal assets. Finally, a private company enhances a company’s and ability to attract investment and lending opportunities.

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