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Formalising your Business

The beginning of the new year is traditionally a time for goal setting. You may be among the many who have made a resolution to start an online business in the new year, either as a hobby, a side hustle to supplement your income or maybe you want to leave formal employment and concentrate on your business full time.
With advancement in technologies, starting an online business has never been easier. The internet has made it possible for anyone to sell almost anything, and having access to customers anywhere around the world. You can now sell your goods and services right from the comfort of your home on your laptop or phone simply by using an online App or platform and reach a global market. Online shopping platforms such as Jumia, Jiji, Kilimal, Pigiame, Cheki, and even social media platforms such as Facebook, Instagram and WhatsApp, have made it possible for anyone to sell their merchandise online, ranging from clothes, shoes, furniture and other household items, to electronics and phones, and even cars, houses and land, simple by logging in the details of the items on sale on the online platform and allowing potential buyers to purchase the items. You do not have to have the traditional brick and mortar shop to sell your wares.

This then raises an important question, when does selling items online be said to be carrying on business for profit, and therefore requires complying with legal requirements for operation a business?

In this article, we look at some of the considerations for formalising your online business as well as offering practical tips on the most efficient the business structure to adopt for your operations.

When does your hobby becomes a business?

Just because your occasionally sell your old clothes, household items, or car online, does that mean you are running a business and therefore need to comply with the legal requirements for running a business? There is no exact measure as to how many sells make a hobby, a business. As a guide, you may consider whether the following list of questions apply to your situation:

  • Do you treat the activity like a business, such as, keeping financial records?
  • Do you need the income from the activity to pay for living expenses?
  • Do you expect to make a profit from the activity within a few years?
  • Have you made a profit from this type of activity in the past?

If you answered yes to any of the above questions, you may be running a business, and may need to talk with a lawyer to advise on the formalisation of your business to ensure that you comply the legal requirements for running a business and avoid any legal penalties and fines that may be imposed for non-compliance.

So, what are the requirements for online retail businesses?

Starting a Business

The specific legal requirements for starting a business depends on the type of business activity you are undertaking. The easiest way to figure out what legal requirements must be met to start your business is to ask your lawyer. Depending on the business, you might need some or all of these things, or more, to start a business:

  • Business Registration:
    You may need to formal registration of your business. A business can be registered as a business name for a sole trader, a general partnership, a limited liability partnership (LLP), or a limited liability company (LLC). Each of these business formation have their own pros and cons which must be have in mind when choosing the most appropriate business structure to adopt.
    Some of the matters to consider when choosing the business structure include:
    – ease of formation;
    – cost of formation;
    – limitation of liability;
    – tax efficiency;
    – continuing compliance obligations

    You therefore, need to discuss with a lawyer on the most appropriate business structure to adopt for your business.
  • Business Permit and Trade Licences
    The county government where the business is locates may require that you obtain a business permit or trade licences to run the business. The County Government office in your area will advise on the type of business permit required depending on the nature of the business. The most common is the Unified Business Permit. Other licences include trade licence, and fire certificate. Businesses dealing in consumables are required to obtain a health certificate and food hygiene licence. Where the business has an advertising signature, an advertising signage licence is required.
    In addition, certain professional services will require that you obtain certification and licence for the professional body regulation that profession. Most permits and licences are valid for 12 months i.e., from January to December and are renewable upon expiry.
  • Personal Identification Number (PIN)
    Businesses operation in Kenya are required to obtain a PIN from Kenya Revenue Authority (KRA) for tax purposes. The application for the PIN certificate is made on the online platform, iTax. The PIN certificate is also required for other transactions such land purchase, applying for business permits and trade licences, registration of motor vehicles, power connection, and opening bank accounts.
  • Running a Business
    Once you have set up and registered your business and obtained the necessary permits and licenses, the next step is getting certain legal documentations in place to ensure that your business runs smoothly and shield your business from any potential legal risks. Theses may include:Contracts: A contract is an agreement between you and third parties that you deal with in your business, containing a promise to supply goods and services. The contract sets out the terms and conditions on which the products are to be supplied and also act as a record of your agreement, which becomes very crucial when a dispute arises.Some of the common contract used in a business include supply contract, distribution contract, sale contract, purchase order, proforma invoice, and receipts.

    Although some online shopping platforms may have terms and conditions for sales between buyers and sellers, you should always have some documents of your own. The contracts will ensure that there are records of the transactions, and this helps prevent and resolve potential problems.

    Lease: Where you operate your business from a rented space, ensure you have a lease agreement with the landlord. The lease agreement will contain the terms and condition on which the space is let out, such as the names and address of the landlord and tenant, the size of the space let out, the rent payable, the period of the lease, and the manner of termination of the lease, among others.

    Online Terms and Conditions: Where you conduct you business transactions online on your website, you will need to include Online Terms and Conditions on your website, informing your customers of the terms and conditions on which the online sale is made, such as the policies on placing and confirmation of orders, warranties, payment, collection or delivery, returns and exchanges, and refunds.

    Online Privacy Policy: Where your customer are required to provide their personal details, such as names, and addresses, when completing a transaction on your online platform, you need to have an online privacy policy. An Online Privacy Policy can protect your business and inform anyone on your website about what information is collected and how that information is used.

    Intellectual Property Protection: You need to protect your intellectual property associated with your business. These may include trademarks to protect your brand names, slogans, logos, and other designs that identify your business or your product; copyright to protect other creations you might use in your business, such as website content, designs, menus and recipes; and patents to protect new inventions created in your business among others.

    Legal Advice: It is important that you retain the services of a lawyer to offer legal advice to your business. A lawyer may carry out a legal health-check” on the business to ascertain the level of compliance with the law.

    Tax Advice: A tax expert will assist your business comply with the tax obligations and the calculation and payment of taxes. This will save your business money and eventually affect your bottom line.

Do I need to register my business?

Whether you should register your business depends on considerations such as the size of your business, and the kind of activities you are doing. Small scale businesses operated by a sole proprietor can be registered as a simple business name. As the business grows and the becomes more complex, it is advisable to register the business as limited liability company or an LLP.
It is recommended that you should register your business and obtain all required business permits and licenses before engaging in any business activities.
Whether the activity is a hobby, a few private sales per year, or a business, it is important that you comply with all the legal requirements in relation to those activities to forestall any problems that may arise.
Please contact us for assistance in starting and running your own eCommerce business. We offer expert legal advice tailored for your business needs.

This article contains general legal information and does not contain legal advice. For legal advice, please ask a lawyer.