Choosing to Incorporation your business is a big decision for an entrepreneur, and only is really simpler than what others make it out to be.
This article will effectively explain what it means to incorporate a business
1. When are You Ready to Incorporate?
There are two main attractive benefits of incorporating your business. They are the advantages of limited liability and taxes.
The benefits of limited liability are key for company investors choosing incorporation. For investors and owners, private assets are protected from risk. In the event the company fails, the owner's assets are not available to settle a debt of the company. This is very important as about 50% of small businesses make it beyond the first 5 years.
Businesses fail for various reasons, and if things go off the rails you can be sure that your personal assets are protected by limited liability. If you operate your business as a sole proprietorship or a partnership, you will stay personally liable for the debts of the business.
This puts your personal property such as your house, car, and computers all at risk.
Companies are taxed differently than individuals. In Botswana, the tax rate on corporations is lower than the tax rate for individuals. The Botswana Unified Revenue Service (BURS) tax code gives a company the advantage of tax breaks and deductions.
This way you can leave come funds in the business (reinvest in the business), instead of paying a higher personal tax. You can also choose to pay yourself a salary, a dividend, or a combination of the two depending on which one gives you the lowest tax liability.
For example, the flat-rate tax for a company in Botswana is 22% and a personal income tax rate is 25% (for income more than P156, 000). As a business owner, if you leave money in the
company, and do not take it all out for personal expenses, you can increase the value of your company’s assets and pay less in taxes. Thus, you can invest the funds back into the business, and buy new equipment, inventory, spend on marketing or hire new staff.
2. What are the Benefits of Incorporation?
Besides to the already mentioned limited liability and tax benefits, there are at least four other strong advantages of incorporating your business:
Ability to raise capital
With incorporation, you have the option of inviting investors to invest in your company. Without being incorporated, you will not have the structural ability to sell shares to investors. The bank is also likely to offer your business loans because the business is now a separate legal entity.
Your business presents a professional organization. People, institutions who interact with your business name (showing the abbreviations Inc., Ltd. Or Crop) have a more professional image about you than a sole proprietorship. An incorporated business communicates to clients that a long-term vision is in place. Thus the owner has an incentive to deliver on short-term agreements.
Ownership is transferable
An incorporated company’s ownership can be transferred among individuals, by simply selling or transferring shares. This makes long-term succession preparation easier.
An incorporated business can have continuity and is not limited to the lifespan of the owners. The business can live forever.
3. How to Incorporate Your Business in Botswana
a) Choosing a business name
Most entrepreneurs are excited by the creative process of giving their business a name and having it legally registered. Although coming up with a business name can be fun, it is kind of a big deal.
A business name should stand out and be memorable. So, it isn’t great because you like it, it is great because it communicates something to customers.
An effective company name should have 3 qualities. Your business name should have distinctive and disruptive elements.
For example, Giant Shade Ltd.
b) Filing Articles of Incorporation with CIPA
The Companies and Intellectual Property Authority (CIPA) is a parastatal of the government of Botswana under the Ministry of Trade and Industry. Cipa has the mandate to register businesses and protect intellectual property rights.
Once you have decided on your business name, you’ll need to file the initial registration forms with the CIPA. That simply means:
- Firstly, you will fill in the Articles of incorporation
- Then, appoint a company secretary
We are certified company secretaries with CIPA. We have helped many entrepreneurs swiftly register their businesses. Our team of experts is ready to guide you through the whole registration process.
How much does it cost to incorporate a business in Botswana?
The total investment to incorporate with The Brand Business includes incorporation fees, Company Secretary Appointment, Tax registration with BURS. For more on pricing see our online payment options as well.
4. Different Roles in a Company
There are three major roles in a corporation structure: Shareholders, Directors, and Officers. It’s common in small businesses for one person to assume all these roles as the sole shareholder, sole director, and sole officer.
A shareholder is a person, company, or organization that owns shares in a company in a given company. The unit of ownership is called a share and shareholders can own a minimum of one share unit.
Shareholders are legally separate from the company. As a result, shareholders are not liable for the debts of a company. The only exception is if a shareholder waves the limited liability or signs a personal guarantee on behalf of the company.
A director is responsible for strategic planning and overseeing the activities of the corporation. As a group, the directors are called the Board of Directors.
A director is appointed by the shareholder(s) of the company.
Officers are appointed by the directors to run the company’s day-to-day operations.
A company can have as many officer positions as necessary to carry out its activities. Common examples of officer titles include CEO, President, Secretary, and Treasurer. All these can be held by the same person.
5. How to structure your Company?
The percentage of the company that the shareholder owns depends on the number of shares they own. But it doesn’t always represent the voting power of a shareholder. When incorporating your business you can structure the types of shares into classes of share. This is because different classes have different rights and privileges over the company.
For example, you could choose to have your company structured with two share classes. Class A shares could be common voting shares, Class B common voting shares, and Class C common non-voting shares.
You can have multiple share classes when you incorporate, but you don’t need to issue shares in each share class at the beginning.
What are the different types of share classes?
Here is a summary of the different types of share classes:
a) Voting and non-voting shares
The most common difference among share classes is the voting rights of shareholders. Shareholders who hold voting shares have the right to actively participate in the decision-making process (like the founders, directors, senior managers, etc.).
Non-voting shares are for shareholders who are only interested in profiting from the company’s long-term growth but don’t want to be involved in operational decisions.
b) Common shares
Common shares represent proportional ownership in a company. Common shareholders take part in electing the board of directors and vote on corporate policies. Common shares are the standard shares in a company.
The value of common is directly impacted by the growth of the business. So as a company grows and becomes profitable, the value of the common shares will also increase.
Yet, the rights of common shareholders are limited in the event the company is liquidated. Common shares do not have any special priority over the corporation’s assets. Shareholders have rights to a company's assets only after bondholders, preferred shareholders, and other debtholders are paid in full.
The company directors can choose to declare and pay dividends on common shares at any time and in any amount.
c) Preference shares
Preference shares are like common shares and have the same value, but they give their holders special rights. Preferred shares get their name for giving the shareholder a special right, to be paid from company assets before common stockholders, if the company enters bankruptcy. Preferred shareholders also get dividend payouts before common stockholders.
6. After Incorporation: Ongoing Obligations
After incorporating, your business must keep certain documents and records up-to-date, by law. This is where your company secretary shines. There are three main things that every company is legally required to keep up-to-date:
a) Share Register
A shareholder register is a list of active owners of a company's shares, it should be updated on an ongoing basis. The shareholder register requires that every current shareholder is recorded.
b) Company updates
Every time your registered company details change, you are obligated to file forms with CIPA and any relevant local government. For example, when your business address changes or you want to add a new director. You also should ensure that you prepare board resolutions that officially approve the company changes.
This is generally the job of your appointed company secretary.
c) Annual return and resolutions
For an incorporated company, CIPA requires that your company files an annual return and pay the associated fees every year.
Your company secretary also needs to prepare annual shareholder and director resolutions. These documents are all mandatory for your business to stay compliant with CIPA. If you fail to
file the annual return, the government will dissolve your company.