Business name or limited company: which suits you?

What each structure really is

A business name is a trading name registered for a person or a group of partners. If Jane Wanjiru registers "Wanjiru Supplies", the business is still Jane. The name lets her trade, open a business bank account and print invoices under a brand, but in law there is no separate person: the business's debts, contracts and obligations are Jane's own.

A partnership registered under a business name works the same way for two or more people. Each partner is personally responsible for the debts of the business, including debts another partner took on in the business's name. That is a serious risk when partners do not know each other well.

A limited company is a separate legal person created under the Companies Act. It can own property, sign contracts, sue and be sued in its own name. Its owners are shareholders and the people who run it are directors; one person can be both, and a private company can be run by a single director. The company continues to exist even if a shareholder dies or sells their shares.

That separation is the heart of the decision. Everything else, from tax to paperwork, follows from whether you want the business to be you or to be something that stands on its own.

Business name vs limited company: who carries the risk

With a business name, the risk sits with you personally. If the business cannot pay a supplier, a landlord or a lender, they can pursue your personal assets, including your savings, your car and in some cases your land. For a small shop with no debt, that may be an acceptable risk. For a business that signs large contracts, imports stock on credit or employs staff, it can be dangerous.

With a limited company, the shareholders' liability is limited to what they agreed to put into the company. If the company fails, its creditors are paid from the company's own assets, and in the normal case they cannot touch the owners' homes. This is why lenders often ask directors of small companies for personal guarantees: the guarantee puts back the personal risk that the company structure removed.

Limited liability is not a shield against everything. Directors who trade while knowing the company cannot pay its debts, who mix company money with their own, or who commit fraud can be held personally responsible. The company protects honest owners from ordinary business failure, not from their own misconduct.

Think also about the people you go into business with. Two friends running a business name partnership are each fully exposed to the other's decisions. Two shareholders in a company can set out in writing who decides what, and their exposure is limited to what they invested.

Tax, paperwork and yearly obligations

A business name's profit is the owner's income. It goes on the owner's personal tax return and is taxed at personal rates, or under turnover tax if the business is in that band. There is one PIN, one return and one set of records, which is simple.

A company is taxed separately under corporation tax on its profits, and it files its own returns under its own KRA PIN. Money taken out by the owners is taxed again as salary or dividends. For a small business making little profit, this can mean more tax and certainly more accounting work. As profits grow, a company can become more efficient, but that is a question for an accountant, not a rule of thumb.

Companies also have yearly obligations to the registry. They must file annual returns, keep a register of members and directors, and record changes such as new directors or share transfers. Banks and tender boards often ask for an official search showing current directors and shareholders. A business name has far lighter yearly duties, although changes of owners or address still need to be recorded.

Registration cost and time differ too. A business name is cheaper and quicker to register than a company. Both start with a business name search, because neither can be registered under a name that the registry rejects.

Tenders, banks and growing later

Many government and corporate tenders accept both structures, but some, especially larger ones, expect a limited company with a track record. Tender documents frequently ask for the company's registration certificate, an official search, tax compliance for the company and sometimes for each director. A business name can still win smaller tenders, including those reserved for youth, women and persons with disabilities, if it meets the criteria.

Banks open accounts for both. A business name account is linked closely to the owner, while a company account needs board resolutions and the details of each director and signatory. Loans to small companies are often secured by directors' guarantees, so the protection of a company is partly given back when you borrow.

You cannot convert a business name into a company. If you start as a business name and later need a company, you register a new company and move the business into it: contracts, accounts, stock and staff. It is very doable, but it takes planning, so think a year or two ahead when choosing.

A practical rule: if you are testing an idea, have little debt and work alone, a business name registration is usually enough. If you have partners, take on credit, want investors or plan to bid for large contracts, a limited company registration is worth the extra work.

Common questions