When you start a business in Kenya, one of the first choices is the legal form. Most people begin as a sole trader because it is simple, and some later convert to a limited company. The right choice depends on profit, risk and plans, not on what other people do.

The two forms in short

Sole trader (sole proprietorship). You and the business are the same person. You register a business name, you are personally liable for its debts and you pay income tax on the profit as an individual.

Limited company. The company is a separate legal person. It is registered with the Business Registration Service, has directors and shareholders, files annual returns and is taxed on its own profit. Shareholders are liable only for the amount unpaid on their shares, unless they give personal guarantees.

How each is taxed

A sole trader pays income tax on profit at the individual rates, from 10% to 35%, after personal relief. A resident company pays corporation tax at 30% on its profit. If the owner then takes money out as a dividend, a further tax applies, with a withholding tax of 5% for a resident individual; see dividends and paying yourself from a company.

A worked example

Profit of KES 1,000,000 a year:

  • Sole trader: about KES 208,600 of income tax after personal relief.
  • Limited company: tax of KES 300,000 at 30%, leaving KES 700,000; a dividend of all of it attracts 5% withholding, KES 35,000.

At this level the sole trader pays less. As profit rises toward the top rate, the company's flat 30% can look better. The sole trader versus company calculator compares the two for your profit and payout.

Other differences

Sole trader Limited company
Liability Personal and unlimited Limited in most cases
Set-up Business name registration Incorporation, more documents
Annual filings Income tax return Company returns and tax return
Credibility Good for small jobs Often preferred by large clients and lenders
Raising money Hard to bring in investors Can issue shares

Turnover tax

A small sole trader with gross sales between KES 1 million and KES 25 million may pay 3% turnover tax instead; see turnover tax for small businesses. Some companies can use it too, within the same limits.

When to consider a company

  • Profits are high and you want to retain some in the business
  • You carry real risk, such as contracts or borrowing
  • You need partners or investors
  • Large customers require a company

When to stay a sole trader

  • Profits are modest
  • You want the lowest costs and least paperwork
  • The risk of a claim is low

Keep proper records either way

Both need records and a clear line between personal and business money; see separating business and personal money. The monthly profit and loss statement shows how the business is doing, and the sole trader income tax computation and corporation tax computation workbook work out the tax under each form.

Whichever structure you pick, you will need to pay yourself and keep records. See dividends and paying yourself from a company and separating business and personal money, and use the free startup costs and funding calculator to plan what the first year will cost.

This is general information. Ask a registered tax adviser or an advocate before you choose.