Should my small business operate as a registered company?

6 May 2021

The increase in the size and proportion of the informal sector to the total economy has been one of the notable developments in the country in recent years. The entrepreneurial spirit in Zimbabweans has emerged in creative ways across different types of products and economic sectors. Many small businesses are run by individuals, couples or families at varying degrees of success. Whatever success levels emerging in this mixed pot, the most certain thing is small-scale entrepreneurship is finding large-scale expression.

The developing pattern highlighted above generates burning questions among ordinary folk. One of these relates to the choice of vehicle for running such business operations. Should it be a cooperative? Should it be a registered partnership or company? Or should one worry at all about a formal business vehicle? All these inquiries abound and a one-size-fits-all answer is not possible. The brief discussion below, nevertheless, focuses on some of the relevant factors worth interrogating.

To begin with, common observations point to the registered company as the popular choice of vehicle in Zimbabwe for those who prefer formalised business activities. The option of purchasing pre-packaged shelf companies has been a catalyst in this regard.   It makes sense, from this perspective, that the registered company be adopted as a constant reference point and benchmark throughout the discussion below.

Are there notable advantages of incorporating a company to house one’s business endeavours? The answer is a quick ‘yes’. The key benefit has always centred on achieving separation between the business and the owner. This means that the owner’s private possessions are insulated should problems arise in the business, particularly with creditors (a concept often referred to as limited liability).  Under certain circumstances though, the law can treat the owner and her business run under a company as one especially where schemes to defraud third parties are involved. Apart from these special cases, the owner is separate from her business and the problems of the latter do not extend to eat into her private estate. This advantage is nevertheless made ineffective in certain circumstances. Where bank borrowings are involved, our lending institutions typically request directors of the small firm to provide personal guarantees against the company loans. These personal guarantees negate the advantage of limited liability as the owner-directors potentially become liable for the debts of the company.

Apart from limited liability, the registered company provides a structure by which additional participants are admitted to the business. Ownership in the typical company is structured through the mechanism of shares. New participants receive shares that are proportional to what they have contributed in the business and the allocation of shares facilitates measurements of relative ownership among promoters of the business. Without such mechanism, disputes on who controls how much of the business potentially arise over time. Further to this benefit, a registered company comes with a set of rules that guides how the business of the company is conducted, how decisions are made and how internal stakeholders relate with each other. This set of rules is contained in a constitutional document commonly referred to as the Articles of Association. The rules facilitate an orderly conduct of business.  Small enterprises are therefore able to signal a serious intention to do business to future financiers by setting up as registered companies.

Registering a company however comes with responsibilities. First and foremost, the law requires that certain periodic returns and various submissions be made with the Registrar of Companies. This requirement does build some fair amount of bureaucracy into the business operations. Failure to file submissions may lead to de-registration. In addition, it will be noted that privacy is also sacrificed. The said periodic returns are public records and this implies that any person seeking knowledge on the affairs of the company (such as who runs the company, how much profits are being made) is freely able to gain access, at the Registrar’s premises. The file kept at these premises will show what has taken place historically, for example, changes to the team of directors over time as well their identities and certain key resolutions they may have made.  A small business operator thus needs to factor in such considerations.

It was pointed out earlier that the registration of a company establishes separation between the owner and the business. A practical ramification of this separation is that some existing arrangements may be terminated. As an example, a business owner who transfers some assets to his company technically ceases to be the owner of such assets. If the assets were insured under a policy drawn by the business owner, the company is unable to claim on that insurance policy because the company and its owner are separate persons. Random withdrawals of capital from the business for private purposes may also come under check due to the existence of capital maintenance rules safeguarding the interest of creditors.

In conclusion, it is worth noting that the law does not impose the form of business vehicle. Whether entrepreneurs operate as sole traders, registered partnerships or companies, the take is theirs. Thus before settling on an appropriate method of doing business, small enterprises need to ascertain some balance between the various factors pitched above in relation to their specific circumstances.

Written By Hugh Gutura

Hugh is a financial advisory expert and registered legal practitioner.  

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