There are two distinct types of companies available for registration in Kenya: Limited and Unlimited companies. The Companies Act provides the legislative framework for the incorporation, registration, operation, management and regulation of companies and the primary source of law on companies.
While you may not be able to read through the extensive Act, members are required to understand the duties and responsibilities that arise from the type of company that they choose to register.
In this article, we’ll break down the two types of companies going into great detail about the types of limited companies. We aim to leave you with a clear understanding of the various types of companies so you choose the right one for your business needs.
What is a Company?
The Companies Act, 2015 does not provide a definition but is largely accepted that a company is a legal entity, separate from its owners. It is formed by a single person or group of people and must be formed to run a business i.e. profit making. If your main goal is not to make a profit there are various other entities that you can consider including associations, public benefit organizations and trusts.
The final and most important characteristic of a company is that it is governed through its Articles of Association.
The Main Types of Companies
There are two main types of companies available for registration in Kenya, a limited company and an unlimited company. These terms refer to the liability of the company’s owners.
Unlimited Company
An unlimited company does not limit shareholders’ liability. If the company incurs debts, shareholders are personally liable for those debts. This type of company is rare because it exposes owners to significant risk, and is usually only used when personal liability is less of a concern, such as in professional firms.
Limited Company
A limited company is one where the liability of its members aka shareholders is restricted to the amount of the shares they have prescribed to in the company. In other words, shareholders are only responsible for the company’s debts up to the value of their unpaid shares. If a shareholder’s shares are fully paid up, then it follows that no liability accrues to that shareholder. This feature ensures the protection of the personal assets of a shareholder in case of financial loss (unless they become liable for fines or the company’s veil is lifted).
Types of Limited Companies
Limited companies are further distinguished into two more types: companies limited by shares and companies limited by guarantees. This classification affects ownership and liability in different ways.
Company Limited by Shares
A company limited by shares is owned by its shareholders, who own shares in the company. The liability of the shareholders is limited to the amount of the shares they have prescribed i.e. the total investment the shareholder intended to make into the company. This is the most common type of company in Kenya and can be registered as either a private or public companies.
Company Limited by Guarantee
A company limited by guarantee does not have shareholders. Instead, it has members who act as guarantors. The members agree to contribute a predetermined amount if the company is wound up. This structure is often used for non-profit organizations, such as charities or foundations, where profits are reinvested into the company rather than distributed as dividends.
- Key Features:
- No shareholders, only guarantors.
- Limited liability for guarantors to the amount guaranteed.
- Profits are usually reinvested into the company.
Types of Companies Limited by Shares
The final type of distinction to be made is between private limited company commonly abbreviated as LTD and a public limited company abbreviated as PLC. This classification affects how the company raises capital and how it is managed.
Private Limited Company (Ltd)
A private limited company (Ltd) is the most common type of company in Kenya, especially for micro, small and medium-sized enterprises (SMEs). In a private company, shares cannot be sold to the public, and there are limits on the number of shareholders, with a minimum of one (1) and not exceeding fifty (50). This structure allows owners to maintain control over the company and restricts ownership to a small group of people. Private limited companies are ideal for small businesses that need flexibility and control without the pressure of public disclosure.
- Key Features:
- Limited liability for shareholders.
- Restrictions on transferring shares.
- Minimum of one shareholder.
- A maximum of fifty shareholders.
- Not required to disclose financial information to the public.
Public Limited Company (PLC)
A public limited company (PLC) can offer its shares to the general public, through the stock exchange. This structure is often used by large companies seeking to raise capital from a wide range of investors. While public companies can raise significant capital, they are subject to more regulations and public scrutiny. They must also disclose financial information regularly. In contrast, private companies enjoy more privacy and control but may find it harder to access external funding. A public company must have a minimum of seven shareholders and allow its shares to be freely transferred.
- Key Features:
- Limited liability for shareholders.
- Shares are publicly traded.
- Must comply with stringent reporting and disclosure requirements.
Legal and Tax Implications of Companies in Kenya
Each company type has unique legal and tax implications. Private companies, for example, enjoy more flexibility in operations but must still comply with tax obligations such as VAT, PAYE, corporate tax, and the filing of annual returns to the tax authorities and with the Registrar of Companies. Public companies are more heavily regulated, requiring regular audits and disclosures. Companies limited by guarantee may qualify for tax exemptions if they are non-profit organizations, but must ensure compliance with charity laws.
- Tax Implications:
- All companies must register for a KRA PIN to file taxes.
- Public companies must publish audited financial statements.
- Private limited companies face fewer regulatory burdens but must still meet tax obligations.
- Non-profits may qualify for tax exemptions if they meet certain criteria under the Income Tax Act.
Companies Resources
We have created various resources on companies to help you understand companies and continously add on to this repository. Feel free to explore them below
- Read on: How to Register a Company in Kenya.
- Read on: How to Deregister a Company in Kenya.
- Read on: The Main Requirements for Company Registration in Kenya
- Read on: The Duties and Responsibilities of Directors in Kenya
- Read on: The Role of a Company Secretary
Conclusion
Understanding the different types of companies in Kenya is crucial when registering a business. The distinctions between limited and unlimited companies, private and public companies, and companies limited by shares or by guarantee all have significant legal and tax implications. While private limited companies (Ltd) are popular for small businesses, public limited companies (PLC) offer the potential for large-scale capital-raising. Companies limited by shares are favoured for profit-driven ventures, while companies limited by guarantee suit non-profit objectives.
If you’re unsure which type of company is best for your business, consulting with a legal professional will help you understand and make a more informed decision. By aligning your company structure with your business goals, you ensure long-term success and legal compliance under the Companies Act 2015.
Contact us for more information or Schedule a Consultation for personalized services for your company.