In my last article I spoke about one of the ways a business venture can be funded and I talked about crowd funding. Many have shown great interest in this type of funding and I will surely bring the Part 2 of this model. However, “Too many of us are not living our dreams because we are living our fears.” (les Brown). Before getting into this and other types of funding models, the business must first be registered as a separate legal entity.
How is a business registered in Zimbabwe
In Zimbabwe, company registration is the process of legally incorporating a business as stated by the Companies and Other Business Entities Act (Chapter 24:31). Companies are regulated under The Companies and Other Entities Act (Chapter 24:31). There are 6 main types of companies:
- Private Limited company,
- Private business corporation and
- Limited by Guarantee company
- Public company
- Cooperative company
- Statutory cooperation/ parastatals
- Subject to Section 278 – voluntary registration of partnership agreement
- A foreign company
The process involves the following steps:
First is choosing the company structure that is best suitable for the business. The structure is from the choice from the above structures.
- Select a choice of at least 3-5 proposed company names.
- These names are then submitted for name search.
- The name that is available is reserved by the Registrar.
- Drafting the objectives of the company.
- Directors and secretary information that is their full names, ID numbers and their addresses
Documents are then completed and submitted to the Registrar.
Under Section 85 (1) A private company is the one which by its in articles:
- There is a restriction on the right to transfer of shares.
- Limits the members to 50 excluding employees.
- Prohibits invitation to the public to subscribe for its shares or debentures.
- It can commence business as soon as it is registered.
- It can appoint its own directors even those that do not hold shares in the business.
- It also does not issue a prospectus and has no obligation to hold a statutory meeting.
- It does not require filing of its balance sheets, auditors report and directors reports.
It has limited liability.
Private business corporation
It is established in terms of Sec 247 of COBE.
A PBC enables a small business to become a body corporate with limited liability and perpetual succession.
It may have a maximum of 20 members who must be individual natural persons acting in their own right, excluding employees and ex-employees.
Its members are in a similar position to partners, owing each other and the private business corporation a duty of utmost good faith and being agents of the business.
The PBC members must elect directors and a secretary to represent and manage the company.
Limited by guarantee company
This is a company that is created for the purpose of charity work only.
The association must exist for purposes which are in the interest of the public.
It is not intended to generate profit for its members. It prohibits the payment of any dividend to its members.
A company limited by guarantee enjoys all the privileges of a company and must also comply with the provisions of the Act.
A company limited by guarantee: means the members of the company are not compelled to contribute anything whilst the company is an on-going concern. Guarantors’ liability is limited to what he would have agreed to contribute at winding up.
Section 2 defines a public company as “any company that is not a private company”.
It is a business owned by shareholders and run by directors who may not necessarily be shareholders.
Liability is limited meaning that investors can only recover money from existing assets of business. They cannot claim personal assets of shareholders to recover amounts owed by the company.
A promoter who wishes to form a company with a large share capital is likely to form a public company.
There are no restrictions imposed on a public company as regards transferability of shares, subscription by the public to the shares and the size of membership.
Can only commence business after issuance of certificate to commence business Sec 158.
It is a company, other than a private company, which is formed for the provision for its members of a service facilitating the production or marketing of agricultural produce or livestock and the sale of goods to its members (Section 87).
It restricts the right to transfer its shares:
It provides that its ordinary shares shall be of one class only.
There is a limit to the number of shares which may be held by any one member.
This type of company regulates the voting rights of its members.
It limits the dividend which may be paid on its shares to a rate not exceeding ten per centum per annum on the amounts paid up thereon.
It provides for the distribution of a part or the whole of its profits amongst its members on the basis of certain or all of their business transactions with the company.
Benefits of registering a company
A business is a separate legal persona. In other words, it is a person on its own. It must be separated from its owners. It must have its own “life”. In other words, it is a legal persona — the company becomes a person in the eyes of the law. It has a corporate name in which the company can be subject to legal obligations or acquire legal rights. Clause 3 of the Memorandum is brief, blunt and to the point, stating as it does that “The liability of member is limited.” This means that no member can be called upon to pay anything more than the nominal value of the shares by him, or so much thereof as remains unpaid. If his shares are fully paid up, his liability is nil. The limited liability benefit is the biggest benefit of incorporation. The liability of members is limited to the unpaid balance due on his shares. The debts and obligations incurred in the course the company business are those of the company, and the members are not legally responsible to the company’s creditors.
That is, it will enjoy corporate citizenship as it were an independent individual. If the business incurs any debts, losses or for example sells some defective products that do are not fit for the purpose, the owner is not obligated by the Zimbabwean law to satisfy any of these using his/her personal finances or belongings. E.g When most banks collapsed in Zimbabwe e.g Renaissance Bank, the debts it left were ever taken by the shareholders. People’s money which vanished with the bankruptcy declaration. Shareholders were not asked to pay for this loss.
It has Contractual capacity- in that it obtains capacity and powers of a natural person. Property-the company upon incorporation is enabled to own, occupy and acquire or dispose of property just like any normal human being. It is its own being in its right. That means that what the business owns is its own and separate from the shareholders e.g its own bank account, its own loan, credit agreements assets etc. This means that the shareholders’ personal assets are protected should the business fold for whatever reason other than when there are criminal activities involved such as fraud, in this scenario there will be the piercing of the Corporate Veil.
When you look at all the biggest brands in The world e.g Google, Microsoft or even locally Econet Wireless, Smartfiscal Consultants, Delta etc these are not individuals but they are all registrered companies. For any business to succeed and it has to be registered as a company. This enhances reputation of the business. It discourages the notion of “Fly By Night”. A positive perception is created in the minds of the public. The public will be at ease when dealing with the business. Not to say that registered companies do not fleece people. But it helps give confidence.
Registered businesses have a tax advantage in that they are liable to a flat tax rate of 24% Income Tax where as a sole trader is liable to a maximum of 40% tax of their income. Lower tax rates ensure that a business save the money for other projects and can focus on making the business lucrative venture. Depending on how much revenue the business generates, a registered company pays less tax than a sole trader arrangement. Sole traders pay taxes on the additional income received from the business but are however not able to take advantage of allowable tax deductions that are available to registered companies incurred in running the company.
It is always easier to fund raise capital as a registered company than as a sole trader. Registering a company gives you the ability to raise capital through debt capital or through the selling of company shares or any other mode of capital raising. This advantage comes from the fact that a company has a formal structure whereas a sole trader everything is about his “TASTE”. The terms and conditions for the capital are mostly favourable to registered companies than to indiviuals and as well the company is likely to get cheaper financing.
Separation of Management and Ownership
A company may effectively separate ownership from Management. Management reports to the shareholders their operations. For example, the managers of the business can be appointed directors of the business. The shareholders are the stakeholders that owns the entity. For example, GMB a parastatal is run by a Management team and not by the owner.
The company ownership and Management can be passed on to new owners or directors or Management in the event of death, resignation by a member, or sell of the business. In other words a company acquires perpetual succession in that it continues to exist even if there are changes in its membership. If not wound up, a company can exist perpetually, irrespective of the resignation or death of its directors, shareholders/owners or any employee. With a sole trader or unregistered business, the business will die with the owner.
For engagement with other business entities it is important to show legitimacy and Becoming a registered company is also important for engaging other businesses. Many businesses will only hire or engage registered companies because they are legitimate.
Operating as a registered company is the best way you can expand your business and help ensure its continued success.
When a business is registered some suppliers will offer the registered business discounts, credit agreements which they may never give to individuals in business or sole traders. Suppliers commonly reserve wholesale rates for business owners who can show official paperwork. And as well for government tenders one of the requirements is the supplier must be a registered company.
There are so many business opportunities in Zimbabwe but to tap on these opportunities and attracting funding and as well developing an everlasting brand it is important to register a company. It is recommended to that the visionary or founders find a professional consultant or lawyer to assist in the Registration of the Company.
Francis Chitambira is the founder of Smartfiscal Consultants – a Business Advisory firm, He is a cut above the rest business consultant, entrepreneur, business tutor, Tax consultant and business developer. He can be reached at cell/WhatsApp: +263775844941 or email: [email protected]; website: www.smartfiscal.co.zw