business structures in kenya - university of cambridge · business structures in kenya redd+ law...

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Business Structures in Kenya

REDD+ Law Project - Briefing Paper

July 2014

Mona Doshi

Partner, Anjarwalla & Khanna (Africa Legal Network), Mombasa office.

Caroline Wanjiku Kago

Chairperson, Department of Private Law, Kenyatta University School of Law (KUSOL)

Leah Kiguatha

Lecturer, Department of Public Law, Kenyatta University School of Law (KUSOL)

Dr Sophie Chapman

Research Associate, Cambridge Centre for Climate Change Mitigation Research

The REDD+ Law Project is led by Baker & McKenzie and the Cambridge Centre

for Climate Change Mitigation Research (University of Cambridge), working with

international and local advisers/institutions to assist countries in the development

and implementation of their national REDD+ legal frameworks.

More information regarding this initiative is available at

http://www.4cmr.group.cam.ac.uk/research/projects/reddpluslawproject

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CONTENTS __________________________________________________________________________________

About this brief

1 Comparative table of business structures

(Company limited by guarantee, Bare Trust, Society, Non-governmental organisation)

2 Company limited by guarantee

3 Bare Trust

4 Society

5 Non-governmental organisation

6 Joint Venture

__________________________________________________________________________________

ABOUT THIS BRIEF

The finance required to halve emissions from the forest sector to 2030 is expected to be substantial,

with a role for both the public and private sectors. Early involvement by the private sector has largely

been in the role as offset buyers in the voluntary market for forest carbon credits. However, with no

certainty that a future REDD+ market will be established, alternative ways for the private sector to

participate in REDD+ are being contemplated. Given that REDD+ is increasingly being framed as a

sustainable development opportunity that supports ‘green growth,’ the role of the private sector in the

REDD+ value chain and ‘green economy’ are being explored at a high level in many countries,

including Kenya.

In any sector, businesses usually adopt one of several legal structures (often called ‘business

structures.’) It can be expected that businesses seeking to engage in REDD+ implementation or, more

broadly, business opportunities in the ‘green economy’ will do the same. Different business

structures offer different benefits and impose different obligations. A business therefore needs to

consider its aims and needs in order to choose the most appropriate type of business structure.

This Brief summarises the types of business structures available under Kenyan law. It provides both a

comparison table and individual summaries.

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1 COMPARATIVE TABLE OF KENYAN BUSINESS STRUCTURES

Company limited by

guarantee

Bare Trust Society Non-governmental

organisation

Governing legislation Companies Act (Cap 486) Trustees Act (Cap 167)

Trustees (Perpetual

Succession) Act (Cap 164)

Societies Act (Cap.108) Formerly governed by the Non-

Governmental Organizations

Co-Ordination Act, 1990

Now governed by the Public

Benefit Organisation Act Act

No. 18 of 2013

Overview In the event of a wind up, the

liability of members is limited

to the amount that members

have guaranteed to contribute to

the assets of the company.

Can be incorporated either with

or without share capital.

However, in most cases

companies limited by

guarantees are incorporated

without share capital.

Also known as a simple trust.

Each beneficiary has an

immediate and absolute right to

both capital and income.

Beneficiaries also have the right

to actual possession of trust

property.

A flexible method of

constituting an association for

charitable purposes.

A private voluntary grouping of

individuals or associations not

operated for profit or for other

commercial purposes.

Have organized themselves

nationally or internationally for

the public benefit, and the

promotion of social welfare,

charity or research in areas

including health, relief,

agriculture, education, industry

and the supply of amenities and

services.

When should this structure be

used?

Appropriate for professional,

trade and research associations,

and clubs supported by annual

subscription.

Can also be used for registration

of charitable and not for profit

organizations.

Can be used in any situation

where a trust is required.

Best suited for a charity that is

initiated by a group of ten or

more people rather than a single

founder and that relies on

subscriptions, voluntary

contributions and fundraising

efforts rather than on substantial

endowments.

In Kenya, the type of

organizations that are registered

as societies include political

parties, self-help groups,

Incorporated for public benefit

and to promote social welfare,

health, relief, agriculture,

education, industry and the

supply of amenities and

services.

4

Company limited by

guarantee


organisation

neighborhood associations and a

wide variety of charitable

associations.

Members and officers

No maximum number of

members.

Minimum number of members

is two (2) for a private company

or seven (7) for a public

company.

No restrictions on non-Kenyan

citizens.

No minimum or maximum

number of members prescribed

by law but this is set out in the

trust deed.

Trustees may be individuals

(whether local or foreigners), or

a body corporate in the nature of

a trust corporation, or a mixture

of both.

Under Section 36 of the Trustee

Act, in the case of settlements

and dispositions on trust for sale

of land the number of trustees

shall not exceed four, and,

where more than four persons

are named as trustees, the four

first named (who are able and

willing to act) shall alone be the

trustees, and the other persons

named shall not be trustees

unless appointed on the

occurrence of a vacancy. This

section only applies to

settlements and dispositions of

land, and the restrictions

imposed on the number of

trustees do not apply -

(a) in the case of land vested in

trustees for charitable,

ecclesiastical or public

By its definition, the minimum

number of members is ten.


citizens.


citizens

5

Company limited by

guarantee


organisation

purposes; or

(b) Where the net proceeds of

the sale of the land are held for

those purposes.

Foreign investment

restrictions

No foreign investment

restrictions


restrictions


restrictions


restrictions

Initial steps to establishment Members propose a name and

the objects of the Company.

The following details must be

provided upon Registration:

1. Address, nationality, and

occupation of each proposed

director;

2. Address and CPS number of

the Company Secretary; and

3. Address of the proposed

Registered Office, including

its postal and physical

address (plot and section

number, and road name).

Suitable Memorandum and

Articles to be prepared and

filed.

The capital that each member

undertakes to contribute must be

stated in the Memorandum.

The Memorandum and Articles

must be stamped and registered

with the Registrar of

Companies.

Trustees prepare a Trust Deed

which defines:

- the objects of the Trust;

- the Name of the Trust;

- the powers of the trustees;

- the powers to change and

appoint additional trustees;

- resignation and removal of

trustees; and

- meeting of trustees.

Once the trust deed has been

approved by the trustees, the

deed is signed and thereafter

stamped.

After stamping, the trust deed is

presented for registration at the

Registry of Documents

Upon Registration, a certified

copy of the trust deed and a

petition for incorporation is

prepared in the prescribed form

then lodged with the Cabinet

Secretary for land for

incorporation of the trust.

A society may be classified as

'registered' or 'exempt'.

Societies are exempt when they

do not have to comply with

certain requirements, such as

rendering accounts and annual

returns to the Registrar of

Societies.

Applications for registration, or

for exemption from registration,

are made to the Registrar of

Societies. Applications must be

lodged together with a copy of

the society’s (proposed)

constitution and rules.

Once a society has been

registered or is exempt from

registration, the Registrar shall

issue a certificate of registration

or exemption from registration

to the society, in the prescribed

form.

Applications for registration

must be submitted to the

executive director of the Non-

Governmental Organizations

Co-ordination Board in the

prescribed form.

An application for registration is

made by the chief officer of the

proposed organization and must

specify:

(a) other offices of the

organization;

(b) the head office and postal

address of the organization;

(c) the sectors of the proposed

operations;

(d) the districts, divisions and

locations of the proposed

activities;

(e) the proposed average annual

budgets;

(f) the duration of the activities;

(g) all sources of funding;

(h) the national and

international affiliation and the

certificates of incorporation.

6

Company limited by

guarantee


organisation

Please note that this process is

very extensive.

Upon registration a certificate of

registration is issued to the non-

governmental organization.

Fees For incorporation

K.Shs.75,000/=

For incorporation

K.Shs.50,000/=

For incorporation

K.Shs.50,000/=

For incorporation

K.Shs.50,000/=

Taxes applicable Value Added Tax (where

applicable)

Value Added Tax (where

applicable)

Income Tax: The Trust may be

exempted from income tax

pursuant to paragraph 10 of the

First Schedule to the Income

Tax Act (Cap 470) if the trust is

established solely for the

purposes of the relief of poverty

or distress of the public, or for

the advancement of religion or

education

The transfer of property into a

charitable organisation is only

exempt from stamp duty if the

sale or transfer is for the

purposes of construction or

expansion of educational

institutions.

Income Tax

Value Added Tax (where

applicable)

Income Tax (subject to the

exemptions under Paragraph 10

of the first schedule of the

Income Tax Act)

Section 138 (1) of The Customs

and Excise Act (Cap 472)

allows the Finance Minister to

remit, in whole or in part, duty

payable by any person on

certain goods, aircraft, vessels

or vehicles imported by that

person, if the Minister is

satisfied that:

it is in the public interest to

do so

if such goods are donated or

purchased for donation by

any person to non-profit

making organizations or

institutions approved by the

Government, for their

official use or for free

distribution to poor and

needy persons, or

for use in medical treatment,

educational, religious or

rehabilitation work.

7

Company limited by

guarantee


organisation

In Sections 29 and 30 of the

Non-Governmental

Organizations Co-Ordination

Act (1990) a non-governmental

organisation may be entitled to

various tax exemptions (upon

making the necessary

applications and procuring the

necessary consents) relating to:

a. duty in respect of imported

goods or equipment;

b. value added tax on goods

and services required to

meet the Organization’s

objectives;

c. value added tax on income

generating activities; and

d. Income tax for expatriate

employees.

Reporting and compliance If the company has share

capital, it must file an annual

return to the Companies

Registry like any other limited

liability company.

If the company has no share

capital, it must file an annual

return stating the address of the

registered office.

Particulars of the total amount

of the company’s indebtedness

in respect of all mortgages and

charges are required to be

registered with the Registrar of

Subject to less onerous

accounting and reporting

requirements than companies.

Notice in the prescribed form of

any change of the situation of

the office, or of the postal

address, must be given to the

Registrar of Societies within 14

days of such change.

Every registered society shall

keep a register of its members in

such form as the Registrar of

Societies may specify,

containing the:

name and address of each

member,

the date of their admission

to membership, and

The Non-Governmental

Organisations Co-ordination

Board shall keep books of

records of the non-

governmental organisation's

income, expenditure, assets and

liabilities.

8

Company limited by

guarantee


organisation

Companies the date on which he ceases

to be a member.

Every registered society shall

annually furnish to the Registrar

of Societies, on or before the

prescribed date, such returns,

accounts and other documents

as may be prescribed.

Liability of members Members have limited liability.

In the event of a company being

wound up, a company's

members are only liable for the

start-up capital they invested.

A member continues to be held

liable for a period of one year

after their membership ceases.

Trustees are personally liable

for all contractual relationship

that arise with third parties.

Trustees are also personally

liable for the actions of

employees which were done in

the course of their employment

and within the scope of their

authority.

Third parties have no direct

right to payment out of the trust

assets.

Trustees may, however, be

entitled to an indemnity out of

the trust fund for liabilities

properly incurred.

Further, a trustee’s personal

liability may be limited or

exempted by creating express

provisions in the trust

instrument.

Once the society is registered,

all current and subsequent

members are collectively

considered to be a body

corporate under the name of the

society.

The incorporated society takes

on a separate legal identity

distinct from its members.

Body corporate capable of suing

and being sued in its corporate

name.

9

Company limited by

guarantee


organisation

Trustees of a charity may also

apply pursuant to the provisions

of the Trustees (Perpetual

Succession) Act for a certificate

of incorporation of the trustees

as a corporate body. If this

certificate is granted to the

trustees, the trustees shall

thereupon become a body

corporate by the name described

in that certificate, and shall have

perpetual succession and a

common seal, and power to sue

and be sued in their corporate

name.

Therefore, the combination of

registering a trust under the

Trustees (Perpetual Succession)

Act and utilising corporate

trustees may significantly

reduce the risk associated with

exposing individual trustees to

unlimited personal liability.

Trustees may be liable for

breach of trust if, for example,

they act with negligence or in

excess of the duties imposed on

them by the trust.

Where several trustees are

implicated in a breach of trust,

all such trustees will be jointly

and severally liable to the

person entitled to sue.

10

Company limited by

guarantee


organisation

However, for those trustees not

implicated in such breach, they

can benefit from the statutory

liability exemption provisions

set out in Section 32 of the

Trustee Act (Cap 167) which

states that:

“A trustee shall be

chargeable only for money

and securities actually

received by him

notwithstanding his signing

any receipt for the sake of

conformity, and shall be

answerable and accountable

only for his own acts,

receipts, neglects or

defaults, and not for those of

any other trustee."

Jurisdiction National National National National

Disposal of assets on winding

up

After a winding-up order has

been made, the liquidator takes

into his custody or under his

control all the property to which

the company is or appears to be

entitled.

No procedure for winding up is

provided. As such, the trust

deed should set out how the

assets of the trust will be

disposed in the event of it being

wound up.

Upon winding up, the court

appoints a Receiver who shall

then be responsible for the

winding up of the assets of the

society.

No procedure for winding up is

provided. As such, the

procedure for disposal of assets

should be set out in the

constitutional documents.

Restrictions on the activities

of the entity, i.e. commercial

activities, land holding, etc.

Under Article 65 of the

Constitution, a person who is

not a citizen may hold land on

the basis of leasehold tenure for

a term not exceeding ninety-

nine years.






nine years.






nine years.




the basis of leasehold tenure

only, and any such lease,

however granted, shall not

exceed ninety-nine years.

11

Company limited by

guarantee


organisation

A body corporate shall be

regarded as a citizen only if the

body corporate is wholly owned

by one or more citizens.

This means land held by a

company which is not wholly

owned by one or more citizens

can only be held for a leasehold

term of 99 years.

Where a transaction involves

the sale, lease or transfer of

agricultural land in which the

consent of the Land Control

Board is required, then under

the Land Control Act, the Land

Control Board will not grant its

consent if the transaction is to a

non-Kenyan citizen, or a private

company, or co-operative

society, all of whose members

are non-citizens of Kenya.

Any dealing in land is subject to

the user of that land which is set

out in the document of title in

respect to that land. This is

another form of restriction in

land holding (a ‘user of land’ is

the specific ‘use’ to which that

land may be applied, eg.

industrial, residential,

commercial, etc. The user is

normally stated on the





Property held in trust shall be

regarded as being held by a

citizen only if all of the

beneficial interest of the trust is

held by Kenyan citizens.

This means that land held by a

trust which is not wholly owned

by one or more citizens can only

be held for a leasehold term of

99 years.
















respect to that land (a ‘user of

land’ is the specific ‘use’ to





This means that land held by a

society which is not wholly



term of 99 years.
















respect to that land (a ‘user of

land’ is the specific ‘use’ to

which that land may be applied,

eg. industrial, residential,



document of title to that land).

This is another form of





This means that land held by an

NGO which is not wholly



term of 99 years.
















respect to that land. This is

another form of restriction in

land holding.

12

Company limited by

guarantee


organisation

document of title to that land).

which that land may be applied,

eg. industrial, residential,



document of title to that land)

This is another form of

restriction in land holding.


13

2 COMPANY LIMITED BY GUARANTEE

Company limited by guarantee

Governing legislation

Companies Act (Cap 486)

Overview

In the event of a wind up, the liability of members is limited to the amount that members have guaranteed to contribute to the assets of

the company

Can be incorporated either with or without share capital. However, in most cases companies limited by guarantees are incorporated

without share capital.

When should this

structure be used?

Appropriate for professional, trade and research association, and clubs supported by annual subscription. Can also be used for registration or

charitable and not-for-profit organizations.


No maximum number of members provided for

Minimum number of members is two (2) for a private company or seven (7) for a public company

No restrictions on non-Kenyan citizens

Foreign investment

restrictions

No foreign investment restrictions

Initial steps to

establishment

Members propose a name and objects of the Company

Provide details of the addresses, nationality and occupations of the persons proposed to be the directors of the company

Details of the person who is to be the company secretary

Details of the registered office of the company, that is its postal and physical address (plot and section number and road name)

Suitable Memorandum and Articles be prepared and filed

The amount of money that each member undertakes to contribute must be stated in the Memorandum.

The Memorandum and Articles must be stamped and registered with the Registrar of Companies.

Fees For incorporation K.Shs.75,000/=

Taxes applicable

Value Added Tax (where applicable)

14

Reporting and

compliance

If the company has share capital, it must file an annual return like any other limited liability company

If it has no share capital, it must file an annual return stating the address of the registered office.

If the register of members is not kept at the registered office, the address of the place where it is kept.

The particulars of the directors and the secretary, which are required to be kept in the register of directors and secretaries.

Particulars of the total amount of the company’s indebtedness in respect of all mortgages and charges required to be registered with the

Registrar of Companies

Liability of members

Members have limited liability: only liable to the specified amount which a member undertakes to contribute towards the assets of the company

in the event of its being wound up.

Liability extends to one year after a member ceases to be one.

Jurisdiction

National

Disposal of assets on

winding up

After a winding-up order has been made the liquidator takes into his custody or under his control all the property to which the company is or

appears to be entitled.

The liquidator may, after giving such indemnity, if any, as the court may direct, bring or defend in his official name action or other legal

proceeding which relates to that property or which it is necessary to bring or defend for the purpose of effectually winding up the company.

Restrictions on the

activities of the entity,

i.e. commercial activities,

land holding, etc.

Under Article 65 of the Constitution, a person who is not a citizen may hold land on the basis of leasehold tenure for a term not exceeding

ninety-nine years.

A body corporate shall be regarded as a citizen only if the body corporate is wholly owned by one or more citizens.

This means that land held by a company which is not wholly owned by one or more citizens can only be held for a leasehold term of 99 years.

Under the Land Control Act, where a transaction involves the sale, lease or transfer of agricultural land in which the consent of the relevant

Land Control Board is required, the Land Control Board will not grant its consent if such sale, lease or transfer is to a non-Kenyan citizen or a

private company or co-operative society all of whose members are not citizens of Kenya

Any dealing in land is subject to the user of that land which is set out in the document of title in respect to that land. This is another form of


15

Formation of a Limited Liability Company

Companies are registered under the Companies Act Chapter 486, Laws of Kenya:

1. Reservation of Name.1 The lawyer requests the Registrar of Companies to reserve the three names notified to him by letter. This prompts the

Registrar to conduct a search to confirm the names’ availability and desirability.

2. Preparation of Memorandum & Articles of Association and requisite forms.2 The lawyer then proceeds to prepare the Memorandum & Articles

of Association. They incorporate the information procured during the client meeting. The Memorandum and Articles are the constitution of the

company and lay out its objects, its management structure and moderates the relationship between shareholders, directors and third parties. The

constitution documents are prepared along with the requisite registration forms.

3. The constitution and the registration forms are then signed by the founders and the designated company secretary.3

4. They are then forwarded to the collector of stamp duty for the assessment of stamp duty (tax) payable and thereafter the stamp duty is paid. This is a

process that takes 3 to 5 working days.

5. Once the stamp duty payment receipt is back, the constitution and all the registration4 forms are submitted to the Registrar of Companies for the

incorporation of the company.

6. In the case of a Company Limited by Guarantee, the National Intelligence Service then undertakes a security check on all the subscribers to the

Memorandum and Articles of Association.

7. Once the documents are lodged, the certificate of incorporation is prepared and issued within fourteen (14) days. In the case of a Company Limited by

Guarantee, the certificate of incorporation5 is released after a period of between 6 to 12 months owing to the security checks.

1 Section 19(1)(a) of the Companies Act.

2 Section 4 (1), 5, 9, 10, 11, 12 Companies Act.

3 Section 12 Companies Act.

4 Section 15 Companies Act.

5 Section 16(1) Companies Act.

16

8. If requested to do so, the lawyer who is engaged would proceed to procure for the Company a Personal Identification Number (PIN) from the Kenya

Revenue Authority for taxation purposes. In addition the lawyer may also procure a company seal.

There are two points to note:

A Company Limited by Guarantee means that the member of the company have agreed to an amount that will each contribute toward the debts of the

company on winding up. While a Company Limited by shares has the liability of the members limited to the extent to the extent of the share capital

not paid up.

The incorporation of the Company Limited by Guarantee involves a security check on the members that prescribe to the Memorandum. This prolongs

the registration process.

A successful completion of all these steps establishes6 the company as a body corporate with limited liability. The liability is limited either to the extent to the

uncalled up amount on the shares held by a member where the company is limited shares while it is limited to the amount guaranteed by a clause in the

Memorandum of Association. The company also enjoys perpetual succession and the power to hold land.

6 Section 16(2) Companies Act.

17

3 BARE TRUST

Bare Trust

Governing legislation Trustees Act (Cap 167)

Trustees (Perpetual Succession) Act (Cap 164)

Overview Also known as a simple trust

Each beneficiary has an immediate and absolute right to both capital and income

Beneficiaries have the right to take actual possession of trust property

When should this

structure be used?

Can be used in any situation where a trust is required


No minimum or maximum number of members prescribed by law but this is set out in the trust deed

Trustees may be individuals, both local and foreigners, or a body corporate in the nature of a trust corporation, or a mixture of both.

Under section 36 of the Trustee Act, in the case of settlements and dispositions on trust for sale of land the number of trustees shall not exceed

four, and, where more than four persons are named as trustees, the four first named (who are able and willing to act) shall alone be the trustees,

and the other persons named shall not be trustees unless appointed on the occurrence of a vacancy.

This section only applies to settlements and dispositions of land, and the restrictions imposed on the number of trustees do not apply -

(a) in the case of land vested in trustees for charitable, ecclesiastical or public purposes; or

(b) where the net proceeds of the sale of the land are held for those purposes.

Foreign investment

restrictions

No foreign investment restrictions

Initial steps to

establishment

Trustees prepare a Trust Deed which defines:

• the objects of the Trust;

• the Name of the Trust;

• the powers of the trustees;

• the powers to change and appoint additional trustees;

• resignation and removal of trustees; and

• meeting of trustees.

Once the trust deed has been approved by the trustees, the deed is signed and thereafter stamped.

After stamping the trust deed is presented for registration at the Registry of Documents.

18

After registration under the Registry of Documents, a certified copy of the trust deed and a petition for incorporation is prepared in the

prescribed form then lodged with the Minister responsible for Land matters for incorporation of the trust.

Please note that this is a very long process.


Taxes applicable Value Added Tax (where applicable)

Income Tax

The Trust may be exempted from income tax pursuant to paragraph 10 of the First Schedule to the Income Tax Act (Cap 470) if the

trust is established solely for the purposes of the relief of poverty or distress of the public, or for the advancement of religion or

education.

The transfer of property into a charitable organisation would be exempted from payment of stamp duty if it is for the sale or transfer of

land for the construction or expansion of educational institutions.

Reporting and

compliance

Subject to less onerous accounting and reporting requirements than companies

Liability of members Trustees are personally liable to third parties for a contractual relationship.

Third parties would not have a direct right to payment out of the trust assets.

Trustees are also liable personally for the acts of employees done in the course of their employment and within the scope of their authority.

Trustees may, however, be entitled to an indemnity out of the trust fund for liabilities properly incurred.

Further, a Trustee’s personal liability may be limited or exempted by creating express provisions in the trust instrument.

Trustees of a charity may also apply pursuant to the provisions of the Trustees (Perpetual Succession) Act for a certificate of incorporation

of the trustees as a corporate body.

If such a certificate is granted to the trustees the trustees shall thereupon become a body corporate by the name described in that certificate,

and shall have perpetual succession and a common seal, and power to sue and be sued in their corporate name.

Therefore, the combination of registering a trust under the Trustees (Perpetual Succession) Act and utilising corporate trustees may

significantly reduce the risk associated with exposing individual trustees to unlimited personal liability.

Trustees may be liable for breach of trust if, for example, they act with reference to trust property in contravention of the duties imposed on

them by the trust, in excess of those duties or negligently.

Where several trustees are implicated in a breach of trust, all such trustees will be jointly and severally liable to the person entitled to sue in

respect thereof.

However, for those trustees not implicated in such breach, they can benefit from the statutory liability exemption provisions set out in

Section 32 of the Trustee Act (Cap 167) which states that: “A trustee shall be chargeable only for money and securities actually received by

him notwithstanding his signing any receipt for the sake of conformity, and shall be answerable and accountable only for his own acts,

receipts, neglects or defaults, and not for those of any other trustee”.

19

Jurisdiction

National


winding up

No procedure for winding up is provided. As such the trust deed should set out how the assets of the trust will be disposed in the event of it

being wound up.

Restrictions on the



land holding, etc.


ninety-nine years.

A body corporate shall be regarded as a citizen only if the body corporate is wholly owned by one or more citizens.

Property held in trust shall be regarded as being held by a citizen only if all of the beneficial interest of the trust is held by persons who are

citizens. This means that land held by a trust which is not wholly owned by one or more citizens can only be held for a leasehold term of 99

years.



private company or co-operative society all of whose members are not citizens of Kenya.

Any dealing in land is subject to the user of that land which is set out in the document of title in respect to that land.

20

4 SOCIETY

Society


Societies Act (Cap.108)

Overview

It is a flexible method of constituting an association for charitable purposes.

When should this

structure be used?

Best suited for a charity that is initiated by a group of ten or more people rather than a single founder and that relies on subscriptions, voluntary

contributions and fundraising efforts rather than on substantial endowments.

In Kenya, the type of organizations that are registered as societies include political parties, self-help groups, neighborhood associations and a

wide variety of charitable associations.


By its definition, the minimum number of members is ten.

No restrictions on non-Kenyan citizens.

Foreign investment

restrictions

No foreign investment restrictions.

Initial steps to

establishment A society may be a registered society or an exempt society.

Societies are exempt when they do not have to comply with certain requirements of societies such as rendering accounts and annual returns

to the Registrar of Societies.

Applications for registration or for exemption from registration for societies are made to the Registrar of Societies together with a copy of

the society’s constitution and rules

Upon registering a society or exempting it from registration, the Registrar shall issue to the society a certificate of registration or exemption

from registration in the prescribed form.


Taxes applicable Income Tax


21

Reporting and

compliance

Notice in the prescribed form of any change of the situation of the office, or of the postal address, of a registered or exempted society must be

given to the Registrar of Societies within fourteen days of such change.

Every registered society shall keep a register of its members in such form as the Registrar of Societies may specify or as may be prescribed

containing the name and address of each member, the date of his admission to membership and the date on which he ceases to be a member.

Every registered society shall furnish annually to the Registrar of Societies, on or before the prescribed date, such returns, accounts and other

documents as may be prescribed.

Liability of members Once the society is registered, all current and subsequent members are collectively considered to be a body corporate under the name of the

society.

The incorporated society takes on a separate legal identity distinct from its members.

Jurisdiction National


winding up

Upon winding up, the court appoints a Receiver who shall then be responsible for the winding up of the assets of the society.

Restrictions on the



land holding, etc.


ninety-nine years.

A body corporate shall be regarded as a citizen only if the body corporate is wholly owned by one or more citizens. This means that land held

by a society which is not wholly owned by one or more citizens can only be held for a leasehold term of 99 years.



private company or co-operative society all of whose members are not citizens of Kenya.

Any dealing in land is subject to the user of that land which is set out in the document of title in respect to that land (ie. this is a form of

restriction in land holding).

22

Establishing a Common Law (non-Corporate) Trust

Trusts are common forms of association intended for both profit making and not-for-profit. Trusts are regulated under the Trustee Act Chapter 167 Law of

Kenya. The law allows a lot of room for the formulator of the trust deed to set out the nitty-gritty of the trust. A trust is formed as follows:

1. Identify the name of the trust being created.

2. Identify the persons that will be the first trustees (full names and addresses).

3. Identify clearly and accurately the property that will constitute the trust funds

4. Identify clearly and accurately the people or class of persons that will be the beneficiaries of the trust fund.

5. Based on the above information, the Trust Deed (which is the constitution of the Trust) is prepared. In addition to the information in 1 – 4, the Deed should set out

the following to avoid application of the default provisions of the Trustee Act:

a. The person who may appoint new or additional trustees and the extent of that power

b. The reasons for the removal of a trustee

c. The procedure for the amendment of the trust deed

d. Powers of investment and nature of investments that might be made by the trustees or their agents. Care needs to be taken to ensure that the power granted

under the deed does not purport to grant power to allow investments prohibited by the Trustee Act.

e. Power of appointment of official of the trust

f. Extent of the powers of the trustees

g. Dissolution and winding up procedure and powers

h. In the case of a trust set up for charitable purposes, the trust ought be formed as an irrevocable trust

The Trustees will then be required to sign the Trust Deed which is then assessed for stamping and on the payment of a fee, it is stamped. Once this is done,

the trust deed is presented for registration under the Registration of Documents Act (Cap. 285). The process of establishing a common law (non - corporate)

trust ordinarily ends here.

23

This registration does not confer corporate status and the trustees will be liable in their individual capacity even though they may seek indemnity from the

Trust.

Establishing a Common Law (Corporate) Trust

If a corporate trust is desired, then after completing the steps for a common law trust, the founders must application for incorporation under section 5 (1) of

the Trustees (Perpetual Succession) Act (Cap. 164, Laws of Kenya). The objects of the trust must be limited to religious, educational, literary, scientific,

social, athletic or charitable purpose and should be not-for-profit.7 The minister having regard to the extent, nature and objects and other circumstances of the

trust concerned, may grant a certificate accordingly, subject to such conditions or directions generally as he thinks fit to insert in the certificate.8 The

conditions may relate to the qualifications and number of the trustees, their tenure and avoidance of office, the mode of appointing new trustees, the custody

and use of the common seal, the amount of movable or immovable property which the trustees may hold, and the purposes for which that property may be

applied.9

The incorporation of the trust in this manner makes the trustees a body corporate by the name described in the certificate with perpetual succession and a

common seal, and power to sue and be sued in their corporate name and, subject to the conditions and directions contained in the certificate, to hold and

acquire, and by instruments under the common seal to convey, transfer, assign, charge and demise any movable or immovable property.10

7 Section 3(1) of the Trustees (Perpetual Succession) Act.




24

5 NON-GOVERNMENTAL ORGANISATION

Non-governmental organisation

Governing legislation Formerly governed by the Non-Governmental Organizations Co-Ordination Act, 1990.

Now governed by the Public Benefit Organisation Act Act No. 18 of 2013. Commencement by notice but pursuant to the transitional

provisions under the Fifth Schedule of the Act, NGOs registered under the repealed law (Non-Governmental Organizations Co-Ordination Act,

1990) are deemed to be registered under the new law and have up to 1 year to seek registration as a Public Benefit Organization under the new

law.

Overview It is a private voluntary grouping of individuals or associations, not operated for profit or for other commercial purposes but which have

organized themselves nationally or internationally for the benefit of the public at large and for the promotion of social welfare, development

charity or research in the areas inclusive of, but not restricted to, health, relief, agriculture, education, industry and the supply of amenities and

services.

When should this

structure be used?

Incorporated for public benefit and to promote social welfare, health, relief, agriculture, education, industry and the supply of amenities and

services.


No restrictions on non-Kenyan citizens.

Foreign investment

restrictions

No foreign investment restrictions.

Initial steps to

establishment

Applications for registration must be submitted to the executive director of the Non-Governmental Organizations Co-ordination Board in the

prescribed form. An application for registration is made by the chief officer of the proposed organization and it must specify -

(a) other offices of the organization;

(b) the head office and postal address of the organization;

(c) the sectors of the proposed operations;

(d) the districts, divisions and locations of the proposed activities;

(e) the proposed average annual budgets;

(f) the duration of the activities;

(g) all sources of funding;

(h) the national and international affiliation and the certificates of incorporation

Upon registration a certificate of registration is issued.

25


Taxes applicable Income Tax (subject to the exemptions under paragraph 10 of the first schedule of the Income Tax Act

Section 138 (1) of The Customs and Excise Act (Cap 472) allows the Minister responsible for Finance to remit in whole or in part duty payable

by any person on certain goods, aircraft, vessels or vehicles imported by that person if he is satisfied that it is in the public interest to do so if

such goods are donated or purchased for donation by any person to non-profit making organizations or institutions approved by the

Government, for their official use or for free distribution to poor and needy persons, or for use in medical treatment, educational, religious or

rehabilitation work.

The Non-Governmental Organizations Co-Ordination Act, 1990 states in Sections 29 and 30 of this Act that a non-governmental organisation

may be entitled to various tax exemptions (upon making the necessary applications and procuring the necessary consents) relating to:

duty in respect of imported goods or equipment;

value added tax on goods and services required to meet the Organization’s objectives;

value added tax on income generating activities; and

Income tax for expatriate employees.

Reporting and

compliance

Books of records of account of its income, expenditure, assets and liabilities shall be kept with the Non-Governmental Organizations Co-

ordination Board.

Liability of members Body corporate capable of suing and being sued in its corporate name

Jurisdiction National


winding up

No procedure for winding up is provided. As such the procedure for disposal of assets should be set out in the constitutional documents

Restrictions on the



land holding, etc.

Under Article 65 of the Constitution, a person who is not a citizen may hold land on the basis of leasehold tenure only, and any such lease,

however granted, shall not exceed ninety-nine years.

A body corporate shall be regarded as a citizen only if the body corporate is wholly owned by one or more citizens. This means that land

held by an NGO which is not wholly owned by one or more citizens can only be held for a leasehold term of 99 years.


Land Control Board is required, the Land Control Board will not grant its consent if such sale, lease or transfer is to a non-Kenyan citizen

or a private company or co-operative society all of whose members are not citizens of Kenya.

Any dealing in land is subject to the user of that land which is set out in the document of title in respect to that land.

26

Establishing a Non-Governmental Organisation (NGO)

A Non-Governmental Organization is registered under the Non-Governmental Organizations Co-

Ordination Act, 1990. An NGO is defined under section of the Act as “a private voluntary grouping of

individuals or associations, not operated for profit or for other commercial purposes but which have

organized themselves nationally or internationally for the promotion of social welfare, development,

charity or research through mobilization of resources”. 11

NGOs are regulated by the NGO

Coordination Bureau (“the Bureau”).

There is a distinction under the Act between a National NGO and an International NGO. “National

Non-Governmental Organization” is an NGO “registered exclusively in Kenya with authority to

operate within Kenya.12

An International NGO is “a Non- Governmental Organization with the

original incorporation in one or more countries other than Kenya, but operating within Kenya under a

certificate of registration.” 13

Despite a distinction in the definition of the National NGO and an International NGO, the registration

of an International and a national NGO is the same. The process is as follows:

1. Application is made for approval of the name in which the organization is to be registered.14

The name

is reserved and the applicant notifies according if the name is in the opinion of the director desirable.15

2. The registration is undertaken by Application to the Executive of the Bureau. 16

The application is made

by the chief officer. Such application must specify:

a. Who the other officers of the organization are;

b. The head office and postal address of the organization;

c. The sectors of the proposed operations;

d. The districts, divisions and locations of the proposed activities;

e. The proposed average annual budget;

f. The duration of the activities;

g. All sources of funding; and

h. The national and international affiliation and certificates of incorporation;

11

Section 2 of the Non-Governmental Organizations Co-Ordination Act, 1990.

12 Section 2 of the Non-Governmental Organizations Co-Ordination Act, 1990.

13 Section 2 of the Non-Governmental Organizations Co-ordinations Act, 1990.

14 Regulation 8 of the Non-Governmental Organizations Co-ordination Regulations, 1992.

15 Regulation 8(3) of the Non-Governmental Organizations Co-ordination Regulations, 1992.

16 Section 10(3) of the Non-Governmental Organizations Co-Ordination Act 1990, and Regulation 9(1).

27

The application must be signed by the chief officer of the intended organization and must be

accompanied by:

(i) a copy of the minutes of the meeting of the proposed organization authorizing the filing of the

application;

(ii) a copy of the constitution of the proposed organization, specifying the Name of Non-

Governmental Organization, object for which the Non-Governmental Organization is

established, administrative units, custody, use and investment of the funds and property of the

Non-Governmental Organization and the designation of the persons responsible for them,

purpose for which the funds may be used, persons to whom membership is open, Structure

and management of the Organization, quorum and meetings, financial year, manner of

amending the constitution and dissolution mechanisms.

(iii) a notification of the situation of the registered office and postal address of the proposed organization of

the proposed organization.

The director may request other information as the Board may prescribe.

If the Board approves the application for registration, the Director registers the proposed organization

by entering in the register of organizations the name of the organization, postal address, physical

address, classification by sector and date of registration in Kenya.17

The Board then issues a certificate

of registration.18

Upon registration the NGO becomes:19

a. a body corporate

b. with capacity to sue and be sued;

c. Able to take, purchase or otherwise acquire, hold, charge or dispose of movable and

immovable property

d. enter into contracts; and

e. do or perform all such other things or acts necessary for the proper performance of its

functions under the Act, which may lawfully be done or performed by a body corporate.

The NGO will in the near future be superseded by a new legal regime and transform into a Public

Benefits Organization. For the entity to survive the expected change it must re-register under the new

17

Regulation 10, Section 2 of the Non-Governmental Organizations Co-ordinations Act, 1990.

17 Regulation 10 of the Non-Governmental Organizations Co-ordination Regulations, 1992.

18 Section 12 (1) of the Non-Governmental Organizations Coordination Act 1990; and Regulation 11 of the

Non-Governmental Organizations Coordination Regulations, 1992.

19 Section 12(3) of the Non-Governmental Organizations Coordination Act 1990.

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regime. It is important to note that the Public Benefits Organizations Act 2013 (PBO) intended

to repeal the Non-Governmental Organizations Co-Ordination Act, 1990 is awaiting publication

in the Kenya gazette and commencement. Once the PBO comes into force, all NGO will have to

re-register or risk losing their NGO registration status. The information required to register or

re-register under the PBO is not dissimilar to that under the current regime. The biggest

advantage with the PBO is that tax exemptions that have to be applied for under the current

regime accrue automatically.

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6 JOINT VENTURE

JOINT VENTURES IN KENYA


1. Companies Act (Cap 486) if the parties wish to establish a separate legal entity as a vehicle for the joint venture

2. Partnership Act (Cap 29) if the parties wish to carry out the joint venture as partners

3. Limited Liability Partnership Act (Act No. 42 of 2011) if the parties wish to limit their liability in the partnership

4. Law of Contract Act (Cap 23)

Overview

A joint venture is a commercial arrangement between two or more economically independent natural or legal persons who combine

property and expertise in order to carry out a single business enterprise while maintaining a joint proprietary interest, a joint right to

control and a sharing of profits and losses.

The parties in a joint venture must agree on:

The scope and the purpose of the joint venture

The ‘vehicle’ to be used to carry out the joint venture (eg. company, partnership)

The management of the joint venture

The division of power between the parties

The capitialisation and financing of the company including the respective contributions of the parties to the venture

The terms on which any party can transfer its share to a third party

How to deal with disputes and deadlock between the parties

When should this

structure be used?

A joint venture is appropriate for:

Research and development projects

Natural resource exploration and exploitation

Engineering and construction

Production and manufacturing


Company

The minimum number of members is two (2) for a private company or seven (7) for a public company.

There are no restrictions on non-Kenyan citizens.

Partnership

There is no maximum number of partners for partnerships, nor any restrictions on non-Kenyan citizens.

30

Limited Liability Partnership

Section 26 of the Limited Liability Partnership Act provides that a limited liability partnership is required to have at least two partners.

Section 27 provides that it must have at least one manager who is resident in Kenya.

Foreign investment

restrictions

Company, Partnership and Limited Liability Partnership

There are no foreign investment restrictions, however:

Approval from the Kenya Investment Authority is required for new investments

If the investment is going to have an adverse impact on the environment, approval from the National Environment Management

Authority (NEMA) is required

If the investment will have an adverse impact on health, approval from the relevant Public Health Authorities is required (eg. Ministry

of Health, County Health officer for the relevant county)

Approvals from parent ministries for investments in restricted areas include:

i. Investment in forest products requires clearance from the Ministry of Environment and natural resources

ii. Investment in energy and petroleum products requires clearance from the Ministry of Energy

iii. Investment in mining requires clearance from the Ministry of Mining

iv. Investment in the tourism industry requires clearance from the Ministry of Tourism

Initial steps to

establishment

Company

Members propose a name and objects of the Company

Provide details of the addresses, nationality and occupations of the persons proposed to be the directors of the company

Details of the person who is to be the company secretary

Details of the registered office of the company, that is its postal and physical address (plot and section number and road name)

Suitable Memorandum of Articles must be prepared and filed

The amount of money that each member undertakes to contribute must be stated in the Memorandum.

The Memorandum of Articles must be stamped and registered with the Registrar of Companies.

Upon incorporation of the company, the Registrar will issue a Certificate of Incorporation.

Partnership

Partners propose name of the firm

Partners prepare the partnership deed which should, amongst others, provide for:

i. Names of the partners and their capacity;

ii. Date of commencement and dissolution of the partnership;

iii. Assets of the partnership;

31

iv. Details of the registered office of the partnership;

v. The capital of the partnership and the individual partners;

vi. The salary and profit entitlement of the partners;

vii. The banking arrangements and the right to draw cheques;

viii. The partnership accounts.


Section 17 of the Limited Liability Partnership Act provides that in order to register a limited liability partnership, a statement in the

prescribed form with the following details must be lodged with the Registrar of Limited Liability Partnerships:

(a) The name of the partnership

(b) The general nature of the proposed business

(c) The proposed registered office of that partnership

(d) The name, identity document (if any), nationality, and usual place of residence of each person who will be a partner

(e) The name, identity document (if any), nationality, and usual place of residence of each person who will be a manager of the

partnership

The statement must be signed by each person who proposes to be a partner of the proposed limited liability partnership.

Under section 18 of the Act, once the statement lodged under section 17 has been received by the Registrar of Limited Liability

Partnerships and he is satisfied that the requirements of the Act have been complied with, the Registrar shall register the statement and

issue a certificate of registration.

Under Section 7 of the Limited Liability Partnership Act, upon successful registration the limited liability partnership becomes a

separate legal entity from its partners capable of suing and being sued, acquiring, owning, holding and developing or disposing of

movable and immovable property.

Fees

Company

For incorporation between K.Shs.75,000/= - K.Shs.100,000/= plus VAT and costs.

Partnership

For establishment of the partnership K.Shs.50,000/= plus VAT and costs.


For establishment of the limited liability partnership between K.Shs.75,000/= - K.Shs.100,000/= plus VAT and costs.

32

Taxes applicable


Income Tax

Stamp Duty

Excise Duty (where applicable)

PAYE

Customs Duty

Compensating Tax

Reporting and

compliance

Company

If the company has share capital, it must file an annual return like any other limited liability company

If it has no share capital, it must file an annual return stating the address of the registered office.

If the register of members is not kept at the registered office, the address of the place where it is kept must be stated.

The particulars of the directors and the secretary, which are required to be kept in the register of directors and secretaries.

Particulars of the total amount of the company’s indebtedness in respect of all mortgages and charges required to be registered with the

Registrar of Companies

Partnership

Partnerships are subject to less onerous accounting and reporting requirements than companies.


A Limited Liability Partnership must:

(a) Have a manager

(b) Lodge an annual declaration by its manager that the partnership is either solvent or insolvent

(c) Keep proper accounting records

(d) Have a registered office in Kenya

(e) All documents relating to the partnership business when issued must bear the name and registration number of the partnership and a

statement that it is registered with limited liability.

33

Liability of members

Company

Members have limited liability – they are only liable for the specified amount that they undertake to contribute towards the assets of

the company in the event of its being wound up (ie. the distribution or liquidation of assets after dissolution).

Liability extends for one year after a member ceases to be one.

Partnership

Section 11 of the Partnership Act provides that every partner in a firm is jointly liable with the other partners for all debts and

obligations of the firm incurred while s/he is a partner, but a person who is admitted as a partner into an existing firm does not thereby

become liable to the creditors of the firm for anything done before s/he became a partner.


There are no clear lines on the extent of limitation of liability and it appears that there are instances where a partner could be found

liable. Section 10 of the Limited Liability Partnership Act provides that a limited liability partnership shall be solely obligated to an

issue arising from contract, tort or otherwise. A person is not personally liable, directly or indirectly, for such an obligation only

because the person is a partner of the limited liability partnership. However, this shall not affect the personal liability of a partner in

tort for the wrongful act or omission of that partner.

If a partner of a limited liability partnership is liable to a person other than another partner of the partnership as a result of a wrongful

act or omission of that partner in the course of the business of the limited liability partnership or with its authority, the partnership is

liable to the same extent as that partner. The liabilities of a limited liability partnership are payable out of the property of the limited

liability partnership.

Jurisdiction

Company, Partnership and Limited Liability Partnership

Kenya


winding up

Company

After a winding-up order has been made, the liquidator takes into custody or under control all the property to which the company is or

appears to be entitled to.

The liquidator may, after giving such indemnity, if any, as the court may direct, bring or defend in his official name action or other

legal proceeding which relates to that property or which it is necessary to bring or defend for the purpose of effectually winding up the

company.

Under section 311 of the Companies Act, the following shall be paid in priority to all other debts:

34

i. All taxes and local rates due from the company and having become due and payable within twelve months

ii. All Government rents not more than one year in arrear

iii. All wages or salary of any clerk or servant of the company

iv. All retirement benefits contributions of any clerk or servant of the company

Partnership

Under section 48 of the Partnership Act, the following rules apply on dissolution of a partnership:

(a) Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the

partners individually in the proportion in which they were entitled to share profits

(b) The assets of the firm, including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied in

the following manner and order -

(i) In paying the debts and liabilities of the firm to persons who are not partners therein

(ii) In paying to each partner rateably what is due from the firm to him/her for advances as distinguished from capital

(iii) In paying to each partner rateably what is due from the firm to him/her in respect of capital

(iv) The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible

Limited Liability Partnerships

The Fifth Schedule to the Act provides for winding up of limited liability partnerships.

It may be wound up by the court on an application by the partnership or a creditor. It may also be wound up voluntarily by a resolution

passed by all the partners. However, the requirement for an application to the Court applies even if the limited liability partnerships

being wound up voluntarily.

Paragraph 47 of the Fifth Schedule to the Act provides that on completion of the winding up of a limited liability partnership, the

liquidator shall, unless the limited liability partnership agreement otherwise provides, distribute the property among the partners

according to their rights and interests in the partnership, but this is subject to the provisions of the Act regarding the making of

preferential payments.

Paragraph 58 of the Fifth Schedule provides that all proper costs, charges and expenses of, and incidental to, the winding up of a

limited liability partnership (including the remuneration of the liquidator) are payable out of the assets of the partnership in priority to

all other claims.

Restrictions on the


i.e. commercial

activities, land

holding, etc.

Company

Under Article 65 of the Constitution, a person who is not a citizen may hold land on the basis of leasehold tenure for a term not

exceeding ninety-nine years.

A corporate body shall be regarded as a citizen only if the corporate body is wholly owned by one or more citizens. This means that

land held by a company that is not wholly owned by one or more citizens can only be held for a leasehold term of ninety-nine

years.

Under the Land Control Act, where a transaction involves the sale, lease or transfer of agricultural land in which the consent of the

35

relevant Land Control Board is required, the Land Control Board will not grant its consent if such sale, lease or transfer is to a non-

Kenyan citizen or a private company or co-operative society all of whose members are not citizens of Kenya.

Any dealing in land is subject to the user of that land, which is set out in the document of title in respect to that land. This is another

form of restriction in land holding.

Partnerships


exceeding ninety-nine years. This means that if some of the partners in a partnership are not Kenyan citizens, then any land owned by

the partners can only be held for a leasehold term of ninety-nine years.



Kenyan citizen or a private company or co-operative society all of whose members are not citizens of Kenya.

Any dealing in land is subject to the user of that land which is set out in the document of title in respect to that land. This is another




exceeding ninety-nine years. This means that if some of the partners in a limited liability partnership are not Kenyan citizens, then any

land owned by the partners can only be held for a leasehold term of ninety-nine years.



Kenyan citizen or a private company or co-operative society- all of whose members are not citizens of Kenya.

Any dealing in land is subject to the user of that land which is set out in the document of title in respect to that land. This is another
