Most businesses at the lower levels begin either as a sole proprietorship or small partnership. As the business grows and more demands are placed on the business, you may need some experts help such as those corporate investigations team. Your business will as well reach a time when a formal business structure such as a limited liability company or corporation is necessary to be formed.
Why convert your business into a limited liability company in Kenya?
There may be many reasons leading to this, but from a legal perspective, we present three reasons why you need to convert your business into a limited liability company?
To What Extent Are Your Personal Assets at Risk if You Are Sued By a Customer, Creditor, or Employee?
Businesses undergo different phases where the liquidity is high and sometimes low. When your business spending or borrowing reaches certain figures, it is prudent to consider way ahead of time what will happen if you run short of cash. Monitoring and optimizing your online sales can play a crucial role in maintaining a healthy financial position for your business, while if you have a store learning from these shop front installation blogs can be the best choice to keep your store secure.
When your company Can’t Pay staff wages, it is a clear sign that there is a cashflow issue or the company is insolvent.
When your business stays as a sole proprietorship or partnership, your liabilities are not limited. They extend to your personal assets, such as your home, car, or land.
When you convert your business to a limited liability company, your personal assets are not attached to the company, and learning the Cheapest Way To Liquidate A Company can be helpful as well. Consequently, when you are sued by a customer, creditor, or former employee, your assets are not going to be touched.
A limited liability company allows you to enjoy the separation and protection of your personal assets and as such cannot be used when creditors or liability lawsuits come for the company assets. For more insights on managing essential and non-essential expenses, you can explore helpful resources on sites like https://www.readersdigest.co.uk/money/managing-your-money/how-to-differentiate-between-essential-and-non-essential-expenses.
Do You Have Partners?
If you have been operating as a partnership, converting your business to a limited liability company will protect the business from internal disputes that arise among the partners.
Partnership disputes are a common thing and have the potential to destroy a business just the same way negative cash flow would.
While some partners, while forming the partnership, often agree to a written partnership agreement that guides the operation of the business down the line, others never even bother to form a gun agreement. This is very consequential.
When partners sign a formal, customized operating agreement, what they’re doing is safeguarding the business from internal disputes that prove irreconcilable and thus consequential to the continuity of the business.
A properly written limited liability company operating agreement will spell out details that will safeguard the company whenever there is a dispute. Such a document would normally contain items such as:
- A well-defined list of responsibilities for each owner for the day-to-day operation of the business.
- A well-defined formula for distributing profits and losses.
- A well-defined process for making key decisions whenever a dispute arises, and the partners cannot agree. This may include mediation or arbitration processes
- A well-defined set of procedures for handling the exit of one of the partners either through death, divorce or a desire to exit the business.
LLCs help you avoid the double taxation involved in becoming a corporation?
Another reason why you need to convert your business into a limited liability company is because of taxation.
Taxation is a serious concern for many small businesses. When you convert your business to a limited liability company, you stand a chance to take all or most of your yearly profits out of the business without serious ramifications.
One advantage of having a limited liability company, especially when utilizing the best EHR, is having the option of a “pass-through entity” whereby the business itself does not pay income taxes.
What this means is that the business owners will simply declare as income all the business’s end-of-year profits, as well as any separate salary payments that they may take from their business through the year.
This is not possible in the case of a corporation. Governments always treat corporations as unique legal entities which need to file their tax returns and pay taxes on their profit.
And if any of the owners take any profit out of the corporation, they need to pay tax on these profits when filing their personal tax returns, which essentially causes the business’s profits to be taxed twice. For more streamlined and efficient handling of your business’s financial aspects, consider utilizing tools like hrcloud.com.
There may be some advantages that corporations enjoy that limited liability companies don’t enjoy, but it is safer to have an LLC instead of a partnership or a sole proprietorship.
Do you need to convert your business into a limited liability company?
Mundui Murai Advocates has a team of certified business legal experts who will be able to help guide the business in converting to a limited liability company and explain all the benefits that come with this option.
We have helped tens of businesses just like yours navigate the legal requirements of converting your business to a limited liability company as well as handle issues that relate to tax, ownership and other business issues. Talk to us today.