Choosing a legal structure for your business

When starting a business one of the most important questions to consider is what legal structure is best for you. In Rwanda you can either be a sole proprietor or form a company. In the near future it will also be possible to form partnerships once the law governing partnerships is enacted. A sole proprietorship or a sole trader is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business. The profits and losses are accrued to the owner (subject to taxation). A company on the other hand is a type of business enterprise which is a separate legal person from its owners (shareholders). The legal structure you choose for your business will determine amongst other things your tax obligations, ability to access loans, the number and type of shareholders (co-owners of the business) you are allowed to have, your personal liability for business debts and the costs of starting and running your business. A Sole proprietorship is generally suited for a personal business in which you are the only one who has invested capital. It is the most common type of business structure in Rwanda. Its advantages include; it is easy to form, given that you are the only person unlike a company which may have many members who need to sit together and come to an agreement to form it. Also, it is flexible and easy to control given that all the decisions are made by you without having to refer to any board of directors unlike companies. In addition, you receive all the profits as and when you deem appropriate unlike a company where the board of directors and shareholders has to first sit and declare that the company made profits and is solvent before issuing any dividends to its shareholders. Moreover it does not have the cumbersome requirements of companies such as holding annual general meetings, filing annual returns and changes to the memorandum and articles with the company registry. On the flipside, the main disadvantage of a sole proprietorship is that you are personally liable for all the debts and obligations of the business without limit. Companies on the other hand enjoy limited liability, (save for companies whose constitutions stipulate that their liability is unlimited, which are very rare). Typically, in a company, the member/shareholders liability for any debts of the company is limited to the unpaid nominal value of their shares. For example, if the nominal value of shares of Shareholder X in a company is 300,000 RWF and he paid up only 200,000 RWF when the company was being incorporated, Shareholder X’s personal liability for the debts of the company shall be limited to the balance of 100,000 RWF. Also, in a company, ownership is easily transferable through the sale of shares unlike a sole proprietorship which does not have shares. Further, a company enjoys perpetual succession i.e., it continues to exist forever unless it is dissolved by the members. A company is a separate legal person from its members/shareholders. Thus, the death of a member leaves the company unmoved, members may come and go but the Company can go on forever unlike a sole proprietorship which would cease to exist upon the death of the sole proprietor. The continuing existence of the Company irrespective of changes to its membership is particularly helpful to third parties. When a sole proprietor sells his business to another, difficult questions may arise regarding performance of the existing contracts by the new proprietor, the assignment of rights of a personal nature and the validity of agreements made with customers ignorant of the change of proprietorship. However, where the business is a company and the sale is merely of the shares, none of these difficulties arises. The company remains proprietor of the business, performs the existing contracts and retains the benefits of them and enters into future agreements. In case you intend to form a company for your business, you have the option of forming a private limited company or a public limited company. A private limited company is ideal for a small or medium sized business with a limited number of shareholders/members (between 1-100), while a public limited company is ideal if you intend to offer shares to the general public or have more than 100 shareholders/members. This is a brief overview of the legal structures you may consider when setting up a business and their pros and cons. For further guidance seek advice from a legal or tax consultant on the implications of the different business structures. kalricardo@yahoo.com Richard Balenzi is a lawyer