Sole Proprietor or Limited Company: The Tax Differences in Kenya

A sole proprietor’s business profit is taxed as the owner’s own income, at graduated rates from 10 to 35 percent. A company pays 30 percent on its profit, and the owner pays further tax on what the company pays out as dividends or salary. Neither structure is a way to pay less tax. The better fit depends on your profit, how much you take out, and how much extra paperwork you can carry.

Owners often hear that “registering a company saves tax”. That is too simple, and acting on it can be costly.

How each one is taxed

Sole proprietor. You and the business are one taxpayer. The rates below are from Head B of the Third Schedule to the Income Tax Act, for a full year.

Yearly taxable income	Rate
First KES 288,000	10%
Next KES 100,000	25%
Next KES 5,612,000	30%
Next KES 3,600,000	32.5%
Above KES 9,600,000	35%

You then take off personal relief of KES 28,800 a year. Money you draw for yourself is not an expense of the business.

Limited company. The company is a separate taxpayer, paying 30 percent on its taxable profit from the first shilling. It gets no personal relief, and it can pay tax in a year when the owner has drawn nothing. Then the owner’s money comes out in one of two ways:

• Salary. A salary paid to a director is normally an expense of the company if it meets the usual tests, and it goes through PAYE at the same individual rates.
• Dividends. A dividend is paid from profit after tax. The Third Schedule sets a final 5 percent rate on a qualifying dividend to a resident. KRA’s web table shows a different figure for some dividends, so confirm the rate before you declare one.

What the numbers can look like

Example. These are simplified figures for illustration. Each case assumes the same profit, no director’s salary and no other income. They leave out NSSF, SHIF, the Housing Levy, and the cost of running each structure.

Yearly profit	Sole proprietor	Company, profit kept in the business	Company, all profit paid as dividends
KES 1,000,000	208,600	300,000	335,000
KES 12,000,000	3,718,600	3,600,000	4,020,000

The table shows why there is no single answer. At the lower profit, the graduated rates give a smaller figure for the sole proprietor. At the higher profit, the result depends on what you do with the money, because profit kept in a company is taxed again when it is paid out later. A mix of salary and dividends would give different figures again.

So a company can be tax efficient for a business that keeps profit in to grow, but only if the extra cost of running it is worth paying. In these figures it is not for an owner who takes out everything each year.

What each one must do

Many duties are the same for both:

• VAT. You register at KES 5 million of taxable sales a year.
• Employees. You run PAYE and other payroll deductions for staff.
• Withholding tax. You deduct it on listed payments.
• eTIMS. A person who carries on business issues electronic tax invoices, and expenses must meet the same rules.
• Instalment tax. Both pay it, though an individual whose total tax for the year is KES 40,000 or less does not.
• Turnover tax. Both can fall under it if they qualify. It does not cover rent or professional fees. See turnover tax or income tax.

The main differences are these.

	Sole proprietor	Limited company
Income tax return	End of the 4th month, so 30 April, from 1 January 2027	End of the 6th month after the accounting period
Balance of tax	End of the 4th month	End of the 4th month
Accounts	Business results go in your own return	Separate accounts for the company
Company law	No company filings	Annual return and other filings with the Business Registration Service
Responsibility	You are the business, so its tax debts are yours	The company owes its own tax, but directors can be reached in some cases

On that last row, section 18 of the Tax Procedures Act can make directors and controlling members liable if an arrangement leaves the company unable to pay its tax.

The trade-offs in plain terms

A sole proprietorship may suit you if:

• your profit is modest
• you take most of it out to live on
• you want simple filing

A company may suit you if:

• you plan to keep profit in the business
• you need the separate legal status for investors, partners or big contracts
• you can keep company records and filings up to date

Against that, a company’s money is not yours to spend freely. Mixing the two can lead to costs being disallowed and to tax questions for the owner.

Do not restructure only for tax

Section 18A of the Tax Procedures Act lets KRA disregard a scheme whose purpose is to obtain a tax benefit, and work out the tax as if it had never happened. Section 85 sets a penalty of double the tax avoided. A real business reason, written down at the time, matters.

Moving an existing business into a company can also have its own tax effects, on assets, contracts and registrations. Work out the numbers for your own business before you change anything, using your actual accounts.