Many budding entrepreneurs often find themselves questioning whether they should incorporate their business prior to launching their venture or to first see how things go and then decide if it’s worth it. My answer is; it depends on your budget and the scale you wish to conduct your business. To try and explain my notion I will use the following three scenarios:
Scenario 1: Non-professional business with start-up budget of less than $10,000
If you have a budget of $10,000 and wish to start horticulture, chicken farming or egg business which will be directly customer facing operating from the back of your mother’s house or farm, should you register a company? The answer is no! The main reason being there is no advantage that you will get from registering a company. If any disputes might arise from your business activity it is most likely to be with your mum so there is no need to protect yourself by using a corporation for your activities. Generally if you are operating a non-professional, home (non-CBD or commercial space) based business which sells directly to natural persons, there is no need for you to incorporate. The same goes for the following businesses:
- Cross border trading
- Vending (airtime, running market stall)
- Ecocash (mobile money etc)
- Welding, wall building, house plumping, house electrician, freelance motor mechanic, family/wedding photographer or videographer
- Network marketing (Avroy Shlain, MMM, Tupperware etc)
Scenario 2: Professional business
For any professional specific businesses however, you have to incorporate your business either as a limited company or business corporation. The differences between the two will be explored in a blog to follow soon. All professional businesses have to incorporate because the corporate veil gives them legitimacy through ability to brand your business and promote/built that brand and have a corporate bank account and a tax clearance certificate. All professional businesses from consultants, businesses operating in commercial spaces to businesses selling to other businesses (B2B) should incorporate. For example, taking the same situation in scenario 1 above, if you are planning to sell your produce to Food Lovers Market or OK Zimbabwe, then this trade is considered B2B and the corporate business you are dealing with would expect your farming operation to be incorporated and have the necessary paperwork for you to be able to trade with them. The same goes for if you are a photographer, mechanic, plumper, cross border trader and wish to sell your services or products to a registered company.
There are a few situations however, whereby individuals (sole traders) with highly specialised skills which are in demand by a corporate; the company may be willing to forego the normal registered company pre-requisite and opt to hire your services or products. But in the case that your invoice to them exceeds $250, they are forced by the Income Tax Act Chapter 23:06 to deduct 10% withholding tax from your payment and remit it to ZIMRA.
Scenario 3: Business with budget of more than $10,000
Generally I would advise entrepreneurs with businesses capital of $10,000 or more to register and operate the business through the company. The main reason is to create a separate legal person which can take on the business operation and enjoy benefits of registering a company and grow the operations.
Benefits of Incorporating a Business
Some of the benefits of incorporating a business include:
- Separate legal persona: A company is a separate legal entity from the owners (shareholders) of that company. This means the personal finances of the shareholders remain separate from those of the business. Should a company file for liquidation, the finances of the shareholders will not be affected as the company is separate from its owners and cannot thus be held accountable.
- Increased credibility and professionalism: By incorporating a company your business operations appear more genuine, legitimate and you appear to be true to your cause. You can also create a brand, market it and grow the brand and even register a trademark patent on your branding and logo.
- Perpetual life span: Since a business has a perpetual life span and a natural person does not, incorporating your business means your business will continue to exist after the founding entrepreneur has ceased to exist and siblings can inherit the business and carry on with it for generations.
- Business to business: It becomes easier to trade with other companies as companies have corporate bank accounts, company profiles and tax clearance certificates.
- Government contracts: Government often prefer to deal with companies when awarding contracts for various state work thus incorporating gives your business a chance to participate in national and local government tenders.
- Liability protection: A company’s liabilities are limited to the extent of the assets in the company. In other words, the shareholder’s liability in any corporate debt or liability is limited to what the shareholder invested in that business. In a sole proprietorship however, any debts that the business has, the entrepreneur remains personally liable to all debts or liabilities. If a business is unable to pay a debt, the creditor can attack the assets of an owner until the debt is satisfied.
- Taxes: Businesses in Zimbabwe pay income tax at a flat rate of 25.75% whilst individuals pay tax at differing scales depending on the quantum of your income but the highest tax bracket is a massive 45% in Pay As You Earn (PAYE) taxes for those earning above $20,000 per month. Thus by operating through a company, your business pays less tax as opposed to operating as a sole trader.
- Access to corporate finance: A company has access to many instruments of corporate finance which are not available to sole traders such as:
- Credit finance: loans, overdrafts, order finance or asset finance from financial institutions is cheaper for companies compared to individuals.
- Equity placements: equity from new shareholders who can in turn nominate directors to take care of their interests in the company. New capital and additional brainpower on the board of directors can assist a business to grow beyond the founding entrepreneurs’ imagination.
- Mergers and Acquisitions: a company can also be sold to another company and the entrepreneur can have a rainy day and move onto another big idea. It can also be merged with another company to form a bigger company with a more stable balance sheet or in case it has grown too big, it can be split into segmented companies each operating in a specific sector e.g. what Innscor did with Simbisa, Axia etc.
- Initial Public Offering: a company can be listed on a publicly traded stock exchange such as Zimbabwe Stock Exchange (ZSE) as a way of raising new capital.
The decision to incorporate your business operation as a company or not depends on your business model, short term needs and capital at hand. If you need more information about companies or assistance with registering one please get in touch with Tanaka on landline 08677 130 017, cell 0732 469 712 or email email@example.com