Registration key to business growth and value

Late last year, Mr Samuel Kitaka lost a lawsuit in which he had sued a company in Kampala City for allegedly supplying substandard goods for his Katwe-based fruit juice processing factory.

He spent almost all his savings in an attempt to seek justice in a business dispute that dragged on for about two years. Like fate would have it, the case was ruled in favour of the defendants who challenged him for lack of evidence because his company was not registered.

The terrible news that struck him hard also undermined his 15 years’ effort of doing business without bothering to formalise his operations. One could possibly say that he lost because he didn’t deem it necessary to register his business because “after all he was making profits.”

Several entrepreneurs especially in the Small and Medium Enterprise (SMEs) industry could be suffering a similar fate for lack of knowledge or thinking it wise to register their businesses with the registrar of companies.

It is thus important to know that doing business goes beyond bookkeeping and profit margins to getting proper credentials because an individual’s name as a front for attracting customers has serious implications.

Ironically, SMEs often face a lot of challenges in their operations although they represent the backbone of local economies in most developing countries, including Uganda.

These small entrepreneurs operate against heavy odds and slight changes in the external environment hit them strongly. They are often confronted with fierce local and international competition, mismanagement, marketing and financial planning, limited access to information on market opportunities and sources of competitive technology.

It is these constraints, which limit substantially the productive capacity and efficiency of SMEs in Uganda to compete favourably with their counterparts in the region.

Experts in the law say it is smarter for all companies to have a legal backing in cases of financial loss or contractual misunderstandings to be registered by the registrar of companies.

In an interview with Smart Money, Mr Paul Sserwanga, an advocate of the High Court of Uganda says it is a requirement for a company to register before doing business.

“According to the Companies Act as amended, any company that starts business or gets involved in trade of any nature must be registered and it must have articles and memorandum of understanding- specifically stating the objects and nature of its business,” he says.

He adds that upon satisfaction, the registrar of companies issues such a company with a certificate of incorporation the legal document, which allows all registered companies to operate in Uganda.

“SMEs are largely private companies and the law requires that they must have a minimum of two shareholders and a maximum of 50,” he says.
Mr Daniel Joloba, an expert on SMEs working with Enterprise Uganda, says a registered business has enormous tax benefits.

“Contrary to popular beliefs, a business that is registered enjoys better tax benefits than one which is not. For instance, when a business is registered the tax benefits of a registered business are mostly gained through what is called pass-through taxation,” he explains.

This means that the profits from the business are only taxed once and owners do not have to pay both corporate and personal income tax on any monies earned through the business.

Mr Joloba says registering businesses gives them the opportunity to work harmoniously with other entities, explaining, “Increasingly, most legal entities prefer to deal with like-minded legal entities.”

The requirements for bidding for contracts to supply goods, construct a road, supply services, name it all point to a familiar trend of requirements – certificate of incorporation, tax clearance certificate, company bank statements, the list goes on.

However prosperous a business may be, there is almost zero chance that it will attract venture capitalists if it is not registered.
Venture capitalists as a rule; demand to see legal documentation of a business as a starting point.

Even when attracting financial support; banks always want to lend money, but to the right entities. Fronting a business that has no legal documentation is a sure way of being frustrated with the business owners’ loan requests.

“If you are lucky, they will assess your application using the owner’s merits rather than the unregistered business merits. The cost of finance is even normally higher for individuals compared to legally registered businesses,” Mr Joloba says.