Under the laws of Kenya, it is possible for religious congregations to be registered under The Trustees (Perpetual Succession) Act (Chapter 164 of the Laws of Kenya) in order to become an body corporate, with the capacity to own property in its own name. This Act in section 4(1) thereof provides that, “Trustees who have been appointed by anybody or association of persons established for any religious, educational, literary, scientific, social, athletic or charitable purpose, or who have constituted themselves for any such purpose, may apply to the Minister …..for a certificate of incorporation of the trustees as a corporate body.”
EFFECT OF INCORPORATION
As stated above, once the trustees have been incorporated they become a body corporate with a perpetual succession and all other legal indicia appertaining to a body corporate. Section 3(3) of the Trustees (Perpetual Succession) Act states that, once incorporated “the trustees shall thereupon become a body corporate by the name described in the certificate, and shall have perpetual succession and a common seal, and power to sue and be sued in their corporate name and, subject to the conditions and directions contained in the certificate, to hold and acquire, and by instruments under the common seal to convey, transfer, assign, charge and demise any movable or immovable property or any interest therein now or hereafter belonging to, or held for the benefit of, the trust concerned in the same manner and subject to such restrictions and provisions as trustees might so do without incorporation”.
INCORPORATION PROCEDURAL REQUIREMENTS
For the trustees to get incorporated, they should prepare a Trust Deed. The Trust Deed inter alia defines:
• the objects of the Trust;
• the Name of the Trust;
• the powers of the trustees;
• the powers to change and appoint additional trustees;
• resignation and removal of trustees; and
• meeting of trustees.
Execution and stamping of the Trust Deed
Once the trust deed has been approved by the trustees, the deed should be signed as appropriate and thereafter stamped with nominal duty of KShs.200.
Stages of Incorporation
The incorporation of a charitable trust involves two stages:
(a) Registration under the Registry of Documents Act
After stamping being stamped with duty, the trust deed should be presented for registration at the Registry of Documents at Ardhi House. The Registry of Documents is established under the Registry of Documents Act (Chapter 285 of the laws of Kenya). The registration under this Act takes about 1 or 2 weeks.
It should be noted that registration under the Registration of Documents Act does not make a trust into a body corporate. However, once the trust is registered under this Act, the trustees can commence implementing the objects of the trust as a simple trust.
(b) Incorporation under the Trustees (Perpetual Succession) Act
After registration under the Registry of Documents, a certified copy of the trust deed and a petition for incorporation prepared in the prescribed form should be lodged with the Minister for Lands for incorporation of the trust. The petition must state, among other things, that the trustees are desirous of being incorporated under the Act and give a pictorial representation of the common seal of the trust, which must be rounded in shape and with the name of the trust inscribed thereto. The Minister for Lands normally takes about 2 to 3 months after presentation of the petition to issue the Trustees with a Certificate of Incorporation.
TRUSTEES
Please note that the first trustees of an incorporated trust are nominated in the trust deed, and their names will be noted in the certificate of incorporation of the trust. Thereafter, these trustees may retire and new ones appointed as per the provisions of the trust deed. Moreover, additional trustees may be appointed as per the provision of the trust deed. Every change of trustees must be reported to the Registrar of Documents in the prescribed form and noted in the original certificate of incorporation of the Trust.
Nationality of Trustees
The trustees of an incorporate trust may be individuals, both local and foreigners, or a body corporate in the nature of a trust corporation, or a mixture of both. However, the Trustee Act provides that a foreign trustee who remains out of Kenya for a period exceeding 12 months may be removed from office by the remaining trustees.
The trustees are duty bound to comply with the provisions of the trust deed establishing the trust as well as the applicable legal provisions. Trustees must also act in the best interest of the trust and avoid conflict of interest situations. The trustees are however permitted to delegate some of their functions to a committee of trustees or employees of the trust.
When incorporated the trustees are require to exercise their powers and make decisions through resolutions of the board of trustees at duly constituted meetings of trustees. Meetings may also be held through an electronic medium which allows participants to communicate with each other e.g. teleconference or video conference, if this is provided for in the trust deed. Most trust deeds also provide that a resolution assented to in writing by all the trustees shall be deemed to have been duly made notwithstanding the absence of a meeting to resolve the matter.
Normally, the trust deed will also contain a provision empowering the trustees to enact regulations to govern the conduct of their meetings including order of business, voting rights, procedure of recording minutes.
ADVANTAGES OF INCORPORATION AS A CHARITABLE TRUST
(a) The trust becomes a body corporate with:-
• perpetual succession and common seal, whose existence is not affected by the death or other incapacities of its trustees;
• legal capacity to own property in its own name;
• ability sue and be sued in its own name; and
• ability to hire employees in its own name.
(b) The trust is eligible to apply for and obtain:-
• tax exemption from the Kenya Revenue Authority pursuant to paragraph 10 of the First Schedule to the Income Tax Act;
• exemption of land rates payable on its immovable properties; and
• exemption on stamp duty when buying land and property pursuant to section 52(2) (b) of the Stamp Duty Act.
CHANGE OF NAME AND DISSOLUTION
An incorporate trust may by means of a resolution change its name by mean of a special resolution which must be registered at the Lands Office and noted in its original certificate of incorporation. An incorporated trust also may by means of a special resolution resolve to dissolve, in which case its assets could be transferred to another charitable entity with similar objects.
If your Church resolves to incorporate under the Trustees (Perpetual Succession) Act, we should be happy to prepare the relevant trust deed and other documentation on your behalf. Meanwhile, please do not hesitate to contact the writer via mainacy@gmail.com if you require any further information or clarification.
Tuesday, November 16, 2010
Registering a NGO/ Charitable Organisation in Kenya
Registration of NGOs under Kenyan Law
The Non-Governmental Organisations Co-Ordination Act 1990 (Section 2) defines an NGO as “a private voluntary grouping of individuals or associations, not operated for profit or for other commercial purposes but which have organized themselves nationally or internationally for the benefit of the public at large and for the promotion of social welfare, development charity or research in the areas inclusive of, but not restricted to, health, relief, agriculture, education, industry and the supply of amenities and services”.
As this definition includes both local and foreign NGO’s the procedure for registration is similar for both. The only difference is that foreign NGO’s are subject to some additional requirements. The additional requirements in the case of such foreign NGO’s are as follows:
• the organization has to furnish the constitutions of its other branches around the world;
• 1 out of 3 officials of the Kenya branch must be a Kenyan citizens; and
• the officials must be of outstanding character. In the wake of the 11th September 2001 terrorist attack in the USA the NGO’s Board now requires satisfactory references to vouch for the NGOs officials.
Registration Process
The procedure for the registration of an NGO is contained in Sections 10-11 of the Act and Part III of the Regulations (L.N. 152/1992). All applications are to be submitted to the Non-Governmental Organisations Co-Ordination Board, which is based in Nairobi.
Approval of Names
Before an application for registration is made, approval must be obtained from the Director of the Non-Governmental Organizations Board for the name of the NGO to be registered. The application should be made on Form 2, Schedule 1 and should be accompanied by the reservation fee is Kshs.500 (approximately US$ 7).
On receipt of the application and the fees, the Director shall carry out a name search and shall notify the applicant if the name has been approved or not and in the later case, the grounds for rejection will be stated.
If the name is approved it will be entered in a register for reserved names for a period of thirty days or for a longer period not exceeding sixty days. This period commences from the date of notification of name approval to the applicant.
Application for Registration
The application should be in Form 3, Schedule 1. The information to be supplied is basically that set out in Section 10 (3) of the Act which requires the application to be made by the Chief Officer of the proposed organisation and should specify:
a) Other officers of the organisation.. Form 3 specifically states that the personal particulars of the NGO’s three officers must be supplied. These officers must supply two recent passport photographs be resident in Kenya or must intend to take up residence in Kenya once the organization is operational. In practice, after an application is submitted the NGO Board staff will interview at least one official of the proposed NGO on the background of the organization and its funding arrangements.
b) The Head office and postal address of the organisation
c) The sectors of the proposed organisation
d) The districts, divisions and locations of the proposed activities
e) The proposed average annual budgets. These should be an estimate of the proposed spending on various activities. All sources of funding will have to be specified in the application and any national and international affiliation must be disclosed. The NGO Board has indicated that local NGOs must have a “base capital” of Kshs.10,700 (approximately US$ 135) and international NGOs a “base capital” of Kshs.20,700 (approximately 260) or else their registration will not be approved. This is an example of a requirement which has developed ad hoc and is not prescribed in either the Act or the Regulations.
f) The duration of the activities
g) All sources of funding
h) The national and international affiliation and the certificates of incorporation
The application forms must be accompanied by:
a) Five copies of a letter from the sponsor, that is the person or body providing primary financial and material support towards the project.. The letter from the sponsor confirming that it will provide financial and material support to the NGO must be submitted with the application for registration.
b) Two copies of the Organisation’s constitution as well as copies of the constitutions, deeds or statutes of any branches in countries other than Kenya.
c) Two current passport sized photos of the applicant duly endorsed by the sponsor or referee
d) Certificate of registration outside Kenya
e) A copy of the minutes of the proposed Organisation authorising the filing of the application
f) A notification of the location of the office and postal address of the proposed organisation in Form 4, Schedule 1 signed by the chief officer of the proposed organisation
g) The application fee. The application fee for registration of an International NGO is set at Kshs. 22,000. The NGO Board tends to treat NGOs that have foreign sponsors as international NGOs and they must therefore pay the higher registration fee
The application should be typewritten and signed by the Chief Officer of the proposed organisation.
Additional Information
The NGO board and the Director may, under the Act and the Regulations, request for further or better information on the proposed organisation as he may require. Pursuant to this provision the application should include particulars of the founders of the proposed organization, whether Kenyan or foreign. The Board will then carry out “background checks” on the founders; it is not revealed what these entail but it can be assumed that security checks are carried out.
Constitution
The proposed NGO must have a constitution specifying its objects. The NGO Board issues guidelines stating what registration will be rejected if the proposed constitution does not comply with these guidelines.
a) The constitution must be subscribed to by at least three members. Non-natural legal persons are permitted to be subscribers and members of NGOs.
b) the NGO’s name
c) the NGO’s objects and administrative units
d) The custody, use and investment of the funds and property of the Non-Governmental Organisation and the designation of the persons responsible thereof.
e) persons or entities for whom membership is open
f) structure and management of the NGO including
titles of officers, trustees, auditors and their terms of office and methods of election, appointment, dismissal and suspension
composition of committees and their terms of office and methods of election, appointment, dismissal and suspension
g) quorums for and dates of general meetings
h) financial year and periodicity of audit of accounts
i) inspection of books and list of members
j) formation of branches
k) manner of amending the NGO’s name, constitution or rules
l) manner of disposal of the NGO’s property on dissolution.
m) The Schedule also requires that the purpose for which an NGO’s funds may be used must be specified. In particular, every constitution must prohibit the distribution of the NGO’s funds and assets among its members. Clauses which may constitute loopholes for such distribution to members or officials are also prohibited unless they provide for the legitimate reimbursement of expenses incurred in carrying out the NGO’s objects. The constitution should also contain rules governing the awarding of contracts to members or officials.
The Constitution of an NGO must comply with the prescriptions of the Second Schedule of the Regulations. Preferably this should be prepared by a Kenyan Advocate.
Most constitutions provide for a governing council in the form of a board of management to manage the day to day activities of the NGO. The board may appoint a chairman but not a president.
The board’s powers and rules for voting would depend on the constitution of the NGO in question, they are not prescribed by law. Generally, matters are decided by a majority of votes. Constitutions tend to require the disclosure by members of any interests in contracts. Such members are usually not permitted to vote on such matters.
The constitution of an NGO may contain provisions indemnifying members of the board and of the NGO against all costs, losses and expenses they may incur by reason of any contract they enter into or act or thing they do in good faith.
Refusal of registration
The Board has power to refuse to register a proposed NGO if it is satisfied that:
a) its proposed activities or procedures are not in the national interests; or
b) the applicant has given false information in the application; or
c) based on a recommendation of the National Council Organizations (which acts as a collective forum for all NGOs registered under the Act), the applicant should not be registered.
Where the Board does refuse to register an NGO, it must notify the applicant of its refusal within 14 days of its decision in Form 6, Schedule 1. The Act does not specify what an applicant’s rights are if the Board fails to comply with this requirement.
If the applicant feels aggrieved, an appeal from the Board’s decision may be made to the Minister responsible for NGOs. Such an appeal must be made within 60 days from the date of the Board’s decision. The Minister must in turn make his decision within 30 days of receiving the appeal and may request written comments on the matter from the NGO Council.
If the applicant is still not satisfied with the decision of the Minister then a final appeal lies with the High Court of Kenya.
Effects of Registration
Upon registration an NGO becomes a body corporate capable in its name of:
a) suing and being sued;
b) taking, purchasing or otherwise acquiring, holding, charging or disposing of movable and immovable property;
c) entering into contracts; and
d) doing or performing all such things or acts necessary for the proper performance of its functions under the NGO Co-ordination Act.
As a result of its corporate status an NGO registered under the NGO Co-ordination Act does not enjoy any immunities against prosecution such as those available to diplomatic or consular missions.
The NGO Regulations provide that an NGO cannot:
a) change its name or constitution; or
b) become a branch of or in any way affiliated or connected with any organization or group of a political nature which is established outside Kenya; or
c) dissolve itself
without the written consent of the NGO Co-ordination Board.
NGOs tend to be viewed by the Kenyan authorities as potential vehicles for political subversion. In this regard the Kenyan government has repeatedly warned that NGOs interfering in matters of a political nature risk being struck off the NGO register, although it is difficult to determine whether such warnings have ever been implemented in practice.
The NGO Council has adopted a code of conduct that must be followed by all NGOs. If a person feels that an NGO has breached the code then such a complaint may be directed to the NGO Council. The complaint must be in writing setting out the particulars of the alleged breach.
Complaints may be directed to the Chief Executive Officer, National Council of NGOs, Nairobi.
As a body corporate, an NGO may also be sued by its beneficiaries.
(a) The advantages of registering as an NGO include:
(i) Exemptions from duty on imported equipment and goods required for the NGO’s activities in Kenya under certain circumstances.
(ii) Exemptions from Value Added Tax on the NGO’s income generating activities under certain circumstances.
(iii) Exemptions from income tax on the NGO’s expatriate employees.
(iv) Limited liability on members if so provided under the NGO’s constitution.
(v) Applications may be recommended by the NGO Board for Entry Permits in respect of expatriate employees.
(b) The disadvantages of forming an NGO include:
(i) Lengthy delays in the registration process which can be over a year arising from a lengthy vetting process which involves the NGO’s Board seeking of recommendations/objections from relevant government departments or ministries.
(ii) Compliance with various rules. The application for registration as an NGO is to be made in the prescribed form and it must be accompanied with amongst other things, a detailed budget and a certified copy of the constitution of the organisation which must comply with various matters set out in the NGO Rules. Once registered, it must comply with the Code of Conduct for NGOs.
(iii) Various reporting requirements. An annual report has to be made in the prescribed form and submitted to the NGO Board on or before 31st May in every year. Such annual reports outline the projects undertaken by the NGO and how the funds received by donors have been utilized in the projects. The reports become part of the public record and can be inspected by any person upon payment of a fee. In addition, returns have to be filed whenever there are changes in the registered office or postal address or changes of officers or their titles.
(iv) Various restrictions. Once registered, an NGO must not:
• amend its name or constitution and;
• become a branch of or affiliated to or connected with any organisation of a political nature established outside Kenya
except with the prior written consent of the NGO’s Board.
The Non-Governmental Organisations Co-Ordination Act 1990 (Section 2) defines an NGO as “a private voluntary grouping of individuals or associations, not operated for profit or for other commercial purposes but which have organized themselves nationally or internationally for the benefit of the public at large and for the promotion of social welfare, development charity or research in the areas inclusive of, but not restricted to, health, relief, agriculture, education, industry and the supply of amenities and services”.
As this definition includes both local and foreign NGO’s the procedure for registration is similar for both. The only difference is that foreign NGO’s are subject to some additional requirements. The additional requirements in the case of such foreign NGO’s are as follows:
• the organization has to furnish the constitutions of its other branches around the world;
• 1 out of 3 officials of the Kenya branch must be a Kenyan citizens; and
• the officials must be of outstanding character. In the wake of the 11th September 2001 terrorist attack in the USA the NGO’s Board now requires satisfactory references to vouch for the NGOs officials.
Registration Process
The procedure for the registration of an NGO is contained in Sections 10-11 of the Act and Part III of the Regulations (L.N. 152/1992). All applications are to be submitted to the Non-Governmental Organisations Co-Ordination Board, which is based in Nairobi.
Approval of Names
Before an application for registration is made, approval must be obtained from the Director of the Non-Governmental Organizations Board for the name of the NGO to be registered. The application should be made on Form 2, Schedule 1 and should be accompanied by the reservation fee is Kshs.500 (approximately US$ 7).
On receipt of the application and the fees, the Director shall carry out a name search and shall notify the applicant if the name has been approved or not and in the later case, the grounds for rejection will be stated.
If the name is approved it will be entered in a register for reserved names for a period of thirty days or for a longer period not exceeding sixty days. This period commences from the date of notification of name approval to the applicant.
Application for Registration
The application should be in Form 3, Schedule 1. The information to be supplied is basically that set out in Section 10 (3) of the Act which requires the application to be made by the Chief Officer of the proposed organisation and should specify:
a) Other officers of the organisation.. Form 3 specifically states that the personal particulars of the NGO’s three officers must be supplied. These officers must supply two recent passport photographs be resident in Kenya or must intend to take up residence in Kenya once the organization is operational. In practice, after an application is submitted the NGO Board staff will interview at least one official of the proposed NGO on the background of the organization and its funding arrangements.
b) The Head office and postal address of the organisation
c) The sectors of the proposed organisation
d) The districts, divisions and locations of the proposed activities
e) The proposed average annual budgets. These should be an estimate of the proposed spending on various activities. All sources of funding will have to be specified in the application and any national and international affiliation must be disclosed. The NGO Board has indicated that local NGOs must have a “base capital” of Kshs.10,700 (approximately US$ 135) and international NGOs a “base capital” of Kshs.20,700 (approximately 260) or else their registration will not be approved. This is an example of a requirement which has developed ad hoc and is not prescribed in either the Act or the Regulations.
f) The duration of the activities
g) All sources of funding
h) The national and international affiliation and the certificates of incorporation
The application forms must be accompanied by:
a) Five copies of a letter from the sponsor, that is the person or body providing primary financial and material support towards the project.. The letter from the sponsor confirming that it will provide financial and material support to the NGO must be submitted with the application for registration.
b) Two copies of the Organisation’s constitution as well as copies of the constitutions, deeds or statutes of any branches in countries other than Kenya.
c) Two current passport sized photos of the applicant duly endorsed by the sponsor or referee
d) Certificate of registration outside Kenya
e) A copy of the minutes of the proposed Organisation authorising the filing of the application
f) A notification of the location of the office and postal address of the proposed organisation in Form 4, Schedule 1 signed by the chief officer of the proposed organisation
g) The application fee. The application fee for registration of an International NGO is set at Kshs. 22,000. The NGO Board tends to treat NGOs that have foreign sponsors as international NGOs and they must therefore pay the higher registration fee
The application should be typewritten and signed by the Chief Officer of the proposed organisation.
Additional Information
The NGO board and the Director may, under the Act and the Regulations, request for further or better information on the proposed organisation as he may require. Pursuant to this provision the application should include particulars of the founders of the proposed organization, whether Kenyan or foreign. The Board will then carry out “background checks” on the founders; it is not revealed what these entail but it can be assumed that security checks are carried out.
Constitution
The proposed NGO must have a constitution specifying its objects. The NGO Board issues guidelines stating what registration will be rejected if the proposed constitution does not comply with these guidelines.
a) The constitution must be subscribed to by at least three members. Non-natural legal persons are permitted to be subscribers and members of NGOs.
b) the NGO’s name
c) the NGO’s objects and administrative units
d) The custody, use and investment of the funds and property of the Non-Governmental Organisation and the designation of the persons responsible thereof.
e) persons or entities for whom membership is open
f) structure and management of the NGO including
titles of officers, trustees, auditors and their terms of office and methods of election, appointment, dismissal and suspension
composition of committees and their terms of office and methods of election, appointment, dismissal and suspension
g) quorums for and dates of general meetings
h) financial year and periodicity of audit of accounts
i) inspection of books and list of members
j) formation of branches
k) manner of amending the NGO’s name, constitution or rules
l) manner of disposal of the NGO’s property on dissolution.
m) The Schedule also requires that the purpose for which an NGO’s funds may be used must be specified. In particular, every constitution must prohibit the distribution of the NGO’s funds and assets among its members. Clauses which may constitute loopholes for such distribution to members or officials are also prohibited unless they provide for the legitimate reimbursement of expenses incurred in carrying out the NGO’s objects. The constitution should also contain rules governing the awarding of contracts to members or officials.
The Constitution of an NGO must comply with the prescriptions of the Second Schedule of the Regulations. Preferably this should be prepared by a Kenyan Advocate.
Most constitutions provide for a governing council in the form of a board of management to manage the day to day activities of the NGO. The board may appoint a chairman but not a president.
The board’s powers and rules for voting would depend on the constitution of the NGO in question, they are not prescribed by law. Generally, matters are decided by a majority of votes. Constitutions tend to require the disclosure by members of any interests in contracts. Such members are usually not permitted to vote on such matters.
The constitution of an NGO may contain provisions indemnifying members of the board and of the NGO against all costs, losses and expenses they may incur by reason of any contract they enter into or act or thing they do in good faith.
Refusal of registration
The Board has power to refuse to register a proposed NGO if it is satisfied that:
a) its proposed activities or procedures are not in the national interests; or
b) the applicant has given false information in the application; or
c) based on a recommendation of the National Council Organizations (which acts as a collective forum for all NGOs registered under the Act), the applicant should not be registered.
Where the Board does refuse to register an NGO, it must notify the applicant of its refusal within 14 days of its decision in Form 6, Schedule 1. The Act does not specify what an applicant’s rights are if the Board fails to comply with this requirement.
If the applicant feels aggrieved, an appeal from the Board’s decision may be made to the Minister responsible for NGOs. Such an appeal must be made within 60 days from the date of the Board’s decision. The Minister must in turn make his decision within 30 days of receiving the appeal and may request written comments on the matter from the NGO Council.
If the applicant is still not satisfied with the decision of the Minister then a final appeal lies with the High Court of Kenya.
Effects of Registration
Upon registration an NGO becomes a body corporate capable in its name of:
a) suing and being sued;
b) taking, purchasing or otherwise acquiring, holding, charging or disposing of movable and immovable property;
c) entering into contracts; and
d) doing or performing all such things or acts necessary for the proper performance of its functions under the NGO Co-ordination Act.
As a result of its corporate status an NGO registered under the NGO Co-ordination Act does not enjoy any immunities against prosecution such as those available to diplomatic or consular missions.
The NGO Regulations provide that an NGO cannot:
a) change its name or constitution; or
b) become a branch of or in any way affiliated or connected with any organization or group of a political nature which is established outside Kenya; or
c) dissolve itself
without the written consent of the NGO Co-ordination Board.
NGOs tend to be viewed by the Kenyan authorities as potential vehicles for political subversion. In this regard the Kenyan government has repeatedly warned that NGOs interfering in matters of a political nature risk being struck off the NGO register, although it is difficult to determine whether such warnings have ever been implemented in practice.
The NGO Council has adopted a code of conduct that must be followed by all NGOs. If a person feels that an NGO has breached the code then such a complaint may be directed to the NGO Council. The complaint must be in writing setting out the particulars of the alleged breach.
Complaints may be directed to the Chief Executive Officer, National Council of NGOs, Nairobi.
As a body corporate, an NGO may also be sued by its beneficiaries.
(a) The advantages of registering as an NGO include:
(i) Exemptions from duty on imported equipment and goods required for the NGO’s activities in Kenya under certain circumstances.
(ii) Exemptions from Value Added Tax on the NGO’s income generating activities under certain circumstances.
(iii) Exemptions from income tax on the NGO’s expatriate employees.
(iv) Limited liability on members if so provided under the NGO’s constitution.
(v) Applications may be recommended by the NGO Board for Entry Permits in respect of expatriate employees.
(b) The disadvantages of forming an NGO include:
(i) Lengthy delays in the registration process which can be over a year arising from a lengthy vetting process which involves the NGO’s Board seeking of recommendations/objections from relevant government departments or ministries.
(ii) Compliance with various rules. The application for registration as an NGO is to be made in the prescribed form and it must be accompanied with amongst other things, a detailed budget and a certified copy of the constitution of the organisation which must comply with various matters set out in the NGO Rules. Once registered, it must comply with the Code of Conduct for NGOs.
(iii) Various reporting requirements. An annual report has to be made in the prescribed form and submitted to the NGO Board on or before 31st May in every year. Such annual reports outline the projects undertaken by the NGO and how the funds received by donors have been utilized in the projects. The reports become part of the public record and can be inspected by any person upon payment of a fee. In addition, returns have to be filed whenever there are changes in the registered office or postal address or changes of officers or their titles.
(iv) Various restrictions. Once registered, an NGO must not:
• amend its name or constitution and;
• become a branch of or affiliated to or connected with any organisation of a political nature established outside Kenya
except with the prior written consent of the NGO’s Board.
Saturday, July 10, 2010
Doing Business in Kenya
RE: Advantages of incorporation as opposed to other forms of doing business.
___________________________________________________________________________
There are various vehicles through which one may use to trade or transact business in Kenya. These vehicles include: a sole proprietorship business, a partnership, a company limited by shares or by guarantee, a trust, a society, or a Non-governmental Organizations (NGO).
Below are some of the comparisons of trading through a company compared to other forms of business vehicles.
Companies versus sole proprietorship business
Introduction:
Companies in Kenya are regulated under the provisions of the Companies Act (Cap. 486) of the Laws of Kenya. Under the Act one may incorporate a private or public company. Regarding liability of members in a company, a company may be limited by shares or by guarantee. Although unlimited companies may be incorporated under the Act, these are not common.
Compared to a public company, share in a private companies are not freely transferable. Besides, unlike a public company, a private company is prohibited under the Act from inviting the public to subscribe for its shares or debentures.
A company limited by guarantee is usually intended for some charitable objects and is not a suitable vehicle for trading purposes. This reason for is that; in a company limited by guarantee it is generally not permissible for the business profits of the company to be shared out amongst the members of the company by way of dividend payment.
The following are advantages and disadvantage of trading through a company compared to trading through a sole proprietorship business.
1 In the formation of a company, there is usually a substantial amount of start-up costs that must be incurred by the promoters of the company in incorporating the company. These preliminary expenses include the legal fees paid to lawyers for the preparation of incorporation documents (i.e., the memorandum and articles of association) and fees paid to government such as the registration and stamp duty fees. Besides, in the case of a public company limited by shares, additions expenses would be incurred by the promoters in the preparation of prospectuses for the purposes of inviting the public to subscribe for shares or debentures in the company. By contrast, a sole trader has little, if any, start up cost since there are no incorporation documents that needs to be prepared.
2 A company, whether private or public, has a legal personality of its own. This legal attribute makes a company distinct in every aspect from its members. For this reason, a company has the legal capacity to trade, borrow, lend, sue and be sued in its own name. On the other hand, a sole proprietorship as a form of business entity is unincorporated entity and has no legal personality of its own. Due to this fact, there is no separation in law between the sole trader himself and his business. By extension, the assets and liabilities of the business and those of the individual sole trader are the same.
3 The “life” of a sole proprietorship business is dependent on the life and fortunes of the owner. Therefore, in most cases, the death of a sole trader will mean the end of his business. On the other hand, a company is regarded in law as having a perpetual succession. By this is meant that; the existence and business of the company is not affected by death of any of its members. However, this will usually be the case for large public companies and would not apply in a small private company whose existence and business is largely dependent on the goodwill and individual expertise of its main shareholders-who usually also serve as the directors of the company.
4 Compared to a sole proprietor, a company, by virtue of its legal attributes and constitution, is better suited to raise the necessary capital for its business projects. In case of a sole trader, his main sources of funds for the business are: personal savings, trade credits and donations from friends. On the other hand, a company has diverse sources of funding. For a public company, it can raise huge funding for its business from subscription of its shares and debentures by the members of the public through the issue of prospectuses. Moreover, both private and public company can raise the business capital by issue of preference shares. Preference shares, especially cumulative preferences shares, are able to attract huge investors due to the guaranteed income in terms of dividends pay-outs and the security associated preference shares in the event a company’s liquidation. Besides, both private and public companies are viewed by lenders as more stable customers to lend compared to the sole traders. The reason for this is partly because of their perpetual succession attribute. Moreover, companies are better able to secure their borrowings by creating instruments like fixed or floating debentures over their assets. Additionally, the company’s directors are usually called upon by lenders to give personal guarantees to secure the company’s debts and liabilities.
5 The liability of a member in a company is limited. In case of a company limited by shares, the members’ liability is liability to the amounts subscribed by members in the share capital of a company. Where shares are fully paid, even in the events of the liquidation of the company by its creditors, its members cannot be called upon to put more funds in the company’s coffers to satisfy the claims by any unpaid creditors. In a company limited by guarantee, a member liability is limited to the amount guaranteed in the event of liquidation, which is usually a nominal amount. In summary, where a company is unable to pay its debts and for this reason put into liquidation by its creditors, the liability of members in a limited company remains largely unaffected. On the other hand, a sole proprietor has unlimited liability. Besides, as stated above, there is no distinction between the personal debts and liabilities of the owner and those of his business. For these reasons, if the business is unable to pay its creditors, the law permits the business creditors to go after the personal assets of a sole trader and vice versa. Besides, where a sole trader is declared bankruptcy, his business should be liquidated for the benefit of his creditors. By contrast, in a company situation, the bankruptcy of a member does not affect the company and vice versa.
6 Under the provisions of The Income Tax Act (Cap 470) of the Laws of Kenya, companies are allowed to expense the management’s fees and salaries paid to their management team when computing the company’s taxable profits. On the other hand, a sole proprietor is not permitted to deduct his salary from the taxable income of the business and is taxed for both his personal and business incomes.
7 With regard to the rate of taxation, a company is taxed at a fixed rate of 30% on its taxable income (or 37.5% for a foreign branch). This is not to mention some tax holidays and lower rates of taxation that are enjoyed by companies registered to operate in the Export Processing Zones and those that have agreed to list in the stock exchange. On the other hand, the business of a sole trade is not accorded any tax holidays or lower rates of taxation. Moreover, a sole trader is subjected to income tax at graduated rates of taxation.
8 With regard to decision making, a sole proprietor is his own boss and need not consult when taking any business decisions. For this reason, business decisions can be made quicker whenever it is necessary. In a company, the day-to-day decisions are entrusted to the Board of Directors of the company. Other major decisions like capital investments, change of the name of the company and appointment of directors and auditors are left to be resolved by shareholders of the company at the company’s general meetings. Due to the need for consultation, decision process in companies is slower compared to a sole trader situation. Despite this seemingly advantage, the lack of consultation by a sole trade in his decision making process usually precipitates strategically poor and unwise business decisions. On the other hand, in a company situation, any decision made at the board’s level by directors or at the general meeting’s level by shareholders is a result of the reconciliation of rival business ideas that are usually anchored on the experiences and individuals’ expertise. For this reason, the decisions made by company are likely to be strategically superior compared to those made by a sole trader.
9 Whereas a sole trader can keep all the profits made in his business, he equally bears all the losses made by the business. In the case of a company, although the profits will be shared between the various shareholders of the company by dividend pay-outs to the company’s members, the members have no obligation towards the losses that may be reported by the company. In fact, the worst that can happen to members when a company report a trading loss in a particular financial year is lack of dividend payments in that financial year.
10 Each company is legally obligated to file its annual return with the Companies Registry. Besides, each company must conduct its statutory and other general meetings, appoint directors, secretary and auditors for the company. Additionally, each company has a legal duty under the tax statutes to file its various tax returns like income tax returns, provisional assessment returns, VAT returns and PAYE returns with the relevant tax authorities. All these activities result in high administration costs in running a company. Besides, non-compliance with these requirements exposes the directors and the secretary of the company penal consequences. By contrast, other than various tax returns required to be filed by a sole traders under tax statutes, there is no legal obligations to file annul return or appoint directors, secretaries and auditors. In summary, a trader has lower administrative costs to bear compared to a company.
Companies versus partnership
Introduction:
A partnership is a form of business entity that is formed by a minimum of two and a maximum of twenty persons (partners) who come together, sometimes under the terms of some partnership agreement (deed), with the main aim of doing business for profit purposes.
There are two forms of partnerships allowed by law in Kenya. These are: general partnerships and limited partnership. In a general partnership, the liability of all members is unlimited. In, limited partnerships, although some partners are permitted to have limited liability, at least one partner must be a general partner with unlimited liability. Besides, under the provisions of Limited Partnerships Act (Cap. 30) of the Laws of Kenya, limited partnerships must be registered with the Registrar of Companies.
Like a sole trader, a partnership suffers from most of the incapacities and disabilities described above. Below are the main advantages and disadvantages of trading through a company compared to a partnership.
1 The formation of partnership is quicker than in the case of a company. Besides, there is no requirement for registration other than in case of limited partnership. In fact, for general partnership there is no requirement to enter into any deed of partnership or register them. In a company formation, substantial start-up costs must be incurred by the promoters.
2 A partnership is unincorporated entities. For this reason, a partnership will be dissolve as a result of death, insanity, resignation and other incapacities of any of its partners. Besides, there is there is no legal separation between the assets and liabilities of individual partners and those of their business. Moreover, the law regards partners as agents of each other and their business. As a result of these, the mistakes of one partner could bring the whole business to its knees. By contrast, a company has a perpetual succession and legal personality of its own. Therefore, in accompany situation, the company does not get affected by death, resignation, insanity and other incapacities of any of its members. Moreover, in a company situation, a member is not regarded as an agent of other members or of the company (unless where expressly or impliedly authorised to act as such). In addition, in a company situation, the mistakes and liabilities of a member are his own mistakes and liabilities, and cannot be suffered by other members or by the company.
3 Partners in a general partnership have unlimited liability. In a limited partnership situation, at least one of the members must be a general partner with unlimited liability. Due to this, the creditors of the firm may pursue the individual partners for unpaid debts and liabilities of the business without any legal limitations. As discussed above, the members’ liability is a company is limited.
4 In partnership, individual partners are taxed on their salaries and profits derived from the partnership at graduated rates of taxation. On the other hand, companies are taxed at a fixed rate of 30% on their taxable profits (foreign branches are taxed at a rate of 37.5% on their taxable profit derived from Kenya).
5 In a partnership situation, the partners share the profits of the business equally or in the agreed proportion. Similarly, partners are responsible for the losses of the business. In a company situation, the members are paid dividends from the profits of the business, but they are not responsible for the company’s losses.
6 Companies are better able to marshal the necessary resources and funding for their business compared to partnership. The main sources of business capital for partnerships are: the partners’ contributions, trade credits, bank overdrafts and loans from partners. As has been explained above, companies have wide range of sources of funding. Besides, lenders are more willing to lend to companies than to partnerships due to the stability associated with the companies and their ability secure their borrowings by creating debentures over their assets. Partnerships have no legal capacity to create debentures over their assets to secure their borrowings.
Companies versus trusts
Introduction:
A trust is usually constituted by the founder entering into a deed of trust with the intended trustees. To forming a trust, the founder will vested some fund or other resources in the trustees to be administered by them for the benefits of some charitable objects or the beneficiaries. Trustees will usually be permitted to accumulated fund and resources to enlarge the trust fund and resources. The powers and duties of trustees are to a larger extent regulated under the Trustees Act (Cap. 176) of the Laws of Kenya. Moreover, the trustees must obey the directions given by the founder under the instrument of trust.
There are two forms of trusts that can be incorporated in Kenya. These are: private and charitable (public) trusts. Public trusts are intended for some charitable purposes. On the other hand, private trusts are generally intended for the benefit of founder’s family members or other beneficiaries.
Both public and private trusts are not intended as business vehicles. However, a trust can run a business or a company for the benefit of the intended beneficiaries. Compared to a company, the formation of a trust is quicker as there is no compulsory requirement of registration.
Where trusts are used as business vehicles, the trustees will be required to use any profits in furtherance of the trust objects or for the benefit of the beneficiaries. Where trusts are involved in trading, the trustees will be responsible to pay the relevant government taxed and will be jointly and severally liable for any defaults.
The following as the advantages and disadvantages of doing business through a company compared to a trust:
1. Though a trust is not required to be registered, the lack of registration will usually translate into the absence of government’s assistance as government does not generally favour dealing with unregistered entities.
2. If a trust wishes to own land, the trustees would have to incorporate themselves under the Trustees Perpetual Succession Act (Cap. 164) of the Laws of Kenya. However, despite their incorporation, the trustees would not enjoy limited liability and are potentially jointly and severally liable for the mistakes of each other and for breach of trust.
3. The investments in which the surplus funds in trust may employed in regulated by The Trustees Act. These is no such regulations in case of a company.
Companies versus societies
Introduction:
Societies are unincorporated associations of ten or more people established for any purposes that are permitted in law and include establishments such as clubs. Societies are regulated under the Societies Act (Cap. 108) of the Laws of Kenya. These are usually formed for some charitable objects. Political parties are also formed and regulated under The Societies Act.
For charitable societies and political parties, these are exempted from tax payment. Other societies like clubs will be subject to pay taxes unless otherwise exempted. Societies are required to find annual returns and other changes in their management structures, offices and constitutive documents with the Registrar of Societies.
Compared to a company, a trading through a society has the following disadvantages.
(a) Societies are regulated by the Registrar of Societies and their registration is subject to strenuous scrutiny by the security agencies. Companies limited by shares are easy to form and do not get subjected to security agencies scrutiny before they get registered.
(b) Societies have no personality of their own and can only own property though a company or trustees. This increases the administration expenses of running a trust.
Companies versus NGOs
Introduction:
NGOs in Kenya are regulated under The Non-Governmental Organizations Coordination Act, 1990. An NGO by its nature is meant to undertake charitable purposes. In deed, in the Act, an NGO is defined a “a private voluntary grouping of individuals or associations, not operated for profit or for commercial purposes but which have organized themselves nationally and internationally for the benefit of the public at large or for the promotion of social welfare, development, charity or research in areas inclusive of, but not limited to, health, relief, agriculture, education, industry and the supply of amenities and services”. This definition implies that an NGO should be formed for benefit of public at large and not for trading purposes.
However, like the NGOs, companies limited by guarantee are usually formed for charitable purposes. Both the guarantee companies and NGOs will usually be vetted by the security agencies before there are granted registration. By contrast companies limited by shares do not undergo such vetting before they are granted registration.
Like in the case of a company, the formation of a NGO involves quite substantial preliminary expenses. NGOs, like companies, are body corporate and can own property, purchase property, enter into contracts and do all other things in their own names. NGOS are regulated in accordance with the requirement of the Act by the NGO Coordination Board.
Although an NGO may engages in trading activities, any profit derived from such business must be ploughed back to the activities of the NGO. Distribution of profits made by an NGO to its members is prohibited by law. NGOs are usually granted income tax and other tax exemptions on application. However, an NGO that engages in trading risks losing eligibility to be exempted from income tax under paragraph 10 of the First Schedule of the Income Tax Act (Cap. 470) of the Laws of Kenya.
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There are various vehicles through which one may use to trade or transact business in Kenya. These vehicles include: a sole proprietorship business, a partnership, a company limited by shares or by guarantee, a trust, a society, or a Non-governmental Organizations (NGO).
Below are some of the comparisons of trading through a company compared to other forms of business vehicles.
Companies versus sole proprietorship business
Introduction:
Companies in Kenya are regulated under the provisions of the Companies Act (Cap. 486) of the Laws of Kenya. Under the Act one may incorporate a private or public company. Regarding liability of members in a company, a company may be limited by shares or by guarantee. Although unlimited companies may be incorporated under the Act, these are not common.
Compared to a public company, share in a private companies are not freely transferable. Besides, unlike a public company, a private company is prohibited under the Act from inviting the public to subscribe for its shares or debentures.
A company limited by guarantee is usually intended for some charitable objects and is not a suitable vehicle for trading purposes. This reason for is that; in a company limited by guarantee it is generally not permissible for the business profits of the company to be shared out amongst the members of the company by way of dividend payment.
The following are advantages and disadvantage of trading through a company compared to trading through a sole proprietorship business.
1 In the formation of a company, there is usually a substantial amount of start-up costs that must be incurred by the promoters of the company in incorporating the company. These preliminary expenses include the legal fees paid to lawyers for the preparation of incorporation documents (i.e., the memorandum and articles of association) and fees paid to government such as the registration and stamp duty fees. Besides, in the case of a public company limited by shares, additions expenses would be incurred by the promoters in the preparation of prospectuses for the purposes of inviting the public to subscribe for shares or debentures in the company. By contrast, a sole trader has little, if any, start up cost since there are no incorporation documents that needs to be prepared.
2 A company, whether private or public, has a legal personality of its own. This legal attribute makes a company distinct in every aspect from its members. For this reason, a company has the legal capacity to trade, borrow, lend, sue and be sued in its own name. On the other hand, a sole proprietorship as a form of business entity is unincorporated entity and has no legal personality of its own. Due to this fact, there is no separation in law between the sole trader himself and his business. By extension, the assets and liabilities of the business and those of the individual sole trader are the same.
3 The “life” of a sole proprietorship business is dependent on the life and fortunes of the owner. Therefore, in most cases, the death of a sole trader will mean the end of his business. On the other hand, a company is regarded in law as having a perpetual succession. By this is meant that; the existence and business of the company is not affected by death of any of its members. However, this will usually be the case for large public companies and would not apply in a small private company whose existence and business is largely dependent on the goodwill and individual expertise of its main shareholders-who usually also serve as the directors of the company.
4 Compared to a sole proprietor, a company, by virtue of its legal attributes and constitution, is better suited to raise the necessary capital for its business projects. In case of a sole trader, his main sources of funds for the business are: personal savings, trade credits and donations from friends. On the other hand, a company has diverse sources of funding. For a public company, it can raise huge funding for its business from subscription of its shares and debentures by the members of the public through the issue of prospectuses. Moreover, both private and public company can raise the business capital by issue of preference shares. Preference shares, especially cumulative preferences shares, are able to attract huge investors due to the guaranteed income in terms of dividends pay-outs and the security associated preference shares in the event a company’s liquidation. Besides, both private and public companies are viewed by lenders as more stable customers to lend compared to the sole traders. The reason for this is partly because of their perpetual succession attribute. Moreover, companies are better able to secure their borrowings by creating instruments like fixed or floating debentures over their assets. Additionally, the company’s directors are usually called upon by lenders to give personal guarantees to secure the company’s debts and liabilities.
5 The liability of a member in a company is limited. In case of a company limited by shares, the members’ liability is liability to the amounts subscribed by members in the share capital of a company. Where shares are fully paid, even in the events of the liquidation of the company by its creditors, its members cannot be called upon to put more funds in the company’s coffers to satisfy the claims by any unpaid creditors. In a company limited by guarantee, a member liability is limited to the amount guaranteed in the event of liquidation, which is usually a nominal amount. In summary, where a company is unable to pay its debts and for this reason put into liquidation by its creditors, the liability of members in a limited company remains largely unaffected. On the other hand, a sole proprietor has unlimited liability. Besides, as stated above, there is no distinction between the personal debts and liabilities of the owner and those of his business. For these reasons, if the business is unable to pay its creditors, the law permits the business creditors to go after the personal assets of a sole trader and vice versa. Besides, where a sole trader is declared bankruptcy, his business should be liquidated for the benefit of his creditors. By contrast, in a company situation, the bankruptcy of a member does not affect the company and vice versa.
6 Under the provisions of The Income Tax Act (Cap 470) of the Laws of Kenya, companies are allowed to expense the management’s fees and salaries paid to their management team when computing the company’s taxable profits. On the other hand, a sole proprietor is not permitted to deduct his salary from the taxable income of the business and is taxed for both his personal and business incomes.
7 With regard to the rate of taxation, a company is taxed at a fixed rate of 30% on its taxable income (or 37.5% for a foreign branch). This is not to mention some tax holidays and lower rates of taxation that are enjoyed by companies registered to operate in the Export Processing Zones and those that have agreed to list in the stock exchange. On the other hand, the business of a sole trade is not accorded any tax holidays or lower rates of taxation. Moreover, a sole trader is subjected to income tax at graduated rates of taxation.
8 With regard to decision making, a sole proprietor is his own boss and need not consult when taking any business decisions. For this reason, business decisions can be made quicker whenever it is necessary. In a company, the day-to-day decisions are entrusted to the Board of Directors of the company. Other major decisions like capital investments, change of the name of the company and appointment of directors and auditors are left to be resolved by shareholders of the company at the company’s general meetings. Due to the need for consultation, decision process in companies is slower compared to a sole trader situation. Despite this seemingly advantage, the lack of consultation by a sole trade in his decision making process usually precipitates strategically poor and unwise business decisions. On the other hand, in a company situation, any decision made at the board’s level by directors or at the general meeting’s level by shareholders is a result of the reconciliation of rival business ideas that are usually anchored on the experiences and individuals’ expertise. For this reason, the decisions made by company are likely to be strategically superior compared to those made by a sole trader.
9 Whereas a sole trader can keep all the profits made in his business, he equally bears all the losses made by the business. In the case of a company, although the profits will be shared between the various shareholders of the company by dividend pay-outs to the company’s members, the members have no obligation towards the losses that may be reported by the company. In fact, the worst that can happen to members when a company report a trading loss in a particular financial year is lack of dividend payments in that financial year.
10 Each company is legally obligated to file its annual return with the Companies Registry. Besides, each company must conduct its statutory and other general meetings, appoint directors, secretary and auditors for the company. Additionally, each company has a legal duty under the tax statutes to file its various tax returns like income tax returns, provisional assessment returns, VAT returns and PAYE returns with the relevant tax authorities. All these activities result in high administration costs in running a company. Besides, non-compliance with these requirements exposes the directors and the secretary of the company penal consequences. By contrast, other than various tax returns required to be filed by a sole traders under tax statutes, there is no legal obligations to file annul return or appoint directors, secretaries and auditors. In summary, a trader has lower administrative costs to bear compared to a company.
Companies versus partnership
Introduction:
A partnership is a form of business entity that is formed by a minimum of two and a maximum of twenty persons (partners) who come together, sometimes under the terms of some partnership agreement (deed), with the main aim of doing business for profit purposes.
There are two forms of partnerships allowed by law in Kenya. These are: general partnerships and limited partnership. In a general partnership, the liability of all members is unlimited. In, limited partnerships, although some partners are permitted to have limited liability, at least one partner must be a general partner with unlimited liability. Besides, under the provisions of Limited Partnerships Act (Cap. 30) of the Laws of Kenya, limited partnerships must be registered with the Registrar of Companies.
Like a sole trader, a partnership suffers from most of the incapacities and disabilities described above. Below are the main advantages and disadvantages of trading through a company compared to a partnership.
1 The formation of partnership is quicker than in the case of a company. Besides, there is no requirement for registration other than in case of limited partnership. In fact, for general partnership there is no requirement to enter into any deed of partnership or register them. In a company formation, substantial start-up costs must be incurred by the promoters.
2 A partnership is unincorporated entities. For this reason, a partnership will be dissolve as a result of death, insanity, resignation and other incapacities of any of its partners. Besides, there is there is no legal separation between the assets and liabilities of individual partners and those of their business. Moreover, the law regards partners as agents of each other and their business. As a result of these, the mistakes of one partner could bring the whole business to its knees. By contrast, a company has a perpetual succession and legal personality of its own. Therefore, in accompany situation, the company does not get affected by death, resignation, insanity and other incapacities of any of its members. Moreover, in a company situation, a member is not regarded as an agent of other members or of the company (unless where expressly or impliedly authorised to act as such). In addition, in a company situation, the mistakes and liabilities of a member are his own mistakes and liabilities, and cannot be suffered by other members or by the company.
3 Partners in a general partnership have unlimited liability. In a limited partnership situation, at least one of the members must be a general partner with unlimited liability. Due to this, the creditors of the firm may pursue the individual partners for unpaid debts and liabilities of the business without any legal limitations. As discussed above, the members’ liability is a company is limited.
4 In partnership, individual partners are taxed on their salaries and profits derived from the partnership at graduated rates of taxation. On the other hand, companies are taxed at a fixed rate of 30% on their taxable profits (foreign branches are taxed at a rate of 37.5% on their taxable profit derived from Kenya).
5 In a partnership situation, the partners share the profits of the business equally or in the agreed proportion. Similarly, partners are responsible for the losses of the business. In a company situation, the members are paid dividends from the profits of the business, but they are not responsible for the company’s losses.
6 Companies are better able to marshal the necessary resources and funding for their business compared to partnership. The main sources of business capital for partnerships are: the partners’ contributions, trade credits, bank overdrafts and loans from partners. As has been explained above, companies have wide range of sources of funding. Besides, lenders are more willing to lend to companies than to partnerships due to the stability associated with the companies and their ability secure their borrowings by creating debentures over their assets. Partnerships have no legal capacity to create debentures over their assets to secure their borrowings.
Companies versus trusts
Introduction:
A trust is usually constituted by the founder entering into a deed of trust with the intended trustees. To forming a trust, the founder will vested some fund or other resources in the trustees to be administered by them for the benefits of some charitable objects or the beneficiaries. Trustees will usually be permitted to accumulated fund and resources to enlarge the trust fund and resources. The powers and duties of trustees are to a larger extent regulated under the Trustees Act (Cap. 176) of the Laws of Kenya. Moreover, the trustees must obey the directions given by the founder under the instrument of trust.
There are two forms of trusts that can be incorporated in Kenya. These are: private and charitable (public) trusts. Public trusts are intended for some charitable purposes. On the other hand, private trusts are generally intended for the benefit of founder’s family members or other beneficiaries.
Both public and private trusts are not intended as business vehicles. However, a trust can run a business or a company for the benefit of the intended beneficiaries. Compared to a company, the formation of a trust is quicker as there is no compulsory requirement of registration.
Where trusts are used as business vehicles, the trustees will be required to use any profits in furtherance of the trust objects or for the benefit of the beneficiaries. Where trusts are involved in trading, the trustees will be responsible to pay the relevant government taxed and will be jointly and severally liable for any defaults.
The following as the advantages and disadvantages of doing business through a company compared to a trust:
1. Though a trust is not required to be registered, the lack of registration will usually translate into the absence of government’s assistance as government does not generally favour dealing with unregistered entities.
2. If a trust wishes to own land, the trustees would have to incorporate themselves under the Trustees Perpetual Succession Act (Cap. 164) of the Laws of Kenya. However, despite their incorporation, the trustees would not enjoy limited liability and are potentially jointly and severally liable for the mistakes of each other and for breach of trust.
3. The investments in which the surplus funds in trust may employed in regulated by The Trustees Act. These is no such regulations in case of a company.
Companies versus societies
Introduction:
Societies are unincorporated associations of ten or more people established for any purposes that are permitted in law and include establishments such as clubs. Societies are regulated under the Societies Act (Cap. 108) of the Laws of Kenya. These are usually formed for some charitable objects. Political parties are also formed and regulated under The Societies Act.
For charitable societies and political parties, these are exempted from tax payment. Other societies like clubs will be subject to pay taxes unless otherwise exempted. Societies are required to find annual returns and other changes in their management structures, offices and constitutive documents with the Registrar of Societies.
Compared to a company, a trading through a society has the following disadvantages.
(a) Societies are regulated by the Registrar of Societies and their registration is subject to strenuous scrutiny by the security agencies. Companies limited by shares are easy to form and do not get subjected to security agencies scrutiny before they get registered.
(b) Societies have no personality of their own and can only own property though a company or trustees. This increases the administration expenses of running a trust.
Companies versus NGOs
Introduction:
NGOs in Kenya are regulated under The Non-Governmental Organizations Coordination Act, 1990. An NGO by its nature is meant to undertake charitable purposes. In deed, in the Act, an NGO is defined a “a private voluntary grouping of individuals or associations, not operated for profit or for commercial purposes but which have organized themselves nationally and internationally for the benefit of the public at large or for the promotion of social welfare, development, charity or research in areas inclusive of, but not limited to, health, relief, agriculture, education, industry and the supply of amenities and services”. This definition implies that an NGO should be formed for benefit of public at large and not for trading purposes.
However, like the NGOs, companies limited by guarantee are usually formed for charitable purposes. Both the guarantee companies and NGOs will usually be vetted by the security agencies before there are granted registration. By contrast companies limited by shares do not undergo such vetting before they are granted registration.
Like in the case of a company, the formation of a NGO involves quite substantial preliminary expenses. NGOs, like companies, are body corporate and can own property, purchase property, enter into contracts and do all other things in their own names. NGOS are regulated in accordance with the requirement of the Act by the NGO Coordination Board.
Although an NGO may engages in trading activities, any profit derived from such business must be ploughed back to the activities of the NGO. Distribution of profits made by an NGO to its members is prohibited by law. NGOs are usually granted income tax and other tax exemptions on application. However, an NGO that engages in trading risks losing eligibility to be exempted from income tax under paragraph 10 of the First Schedule of the Income Tax Act (Cap. 470) of the Laws of Kenya.
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