Forms of Business Ownership

1Why this matters

Two sisters open hardware shops in Musanze in the same month, selling almost the same nails, pipes and paint. Mutesi registers hers in her own name as a sole proprietorship. Keza and two friends set theirs up as a private limited company. A year later a bad decision leaves each shop owing a cement supplier 4,000,000 Frw, and neither shop can pay from what it owns. The supplier goes to court. Mutesi’s family plot is sold to cover what her shop cannot; Keza loses only the money she had put into her company, and keeps her house. Same trade, same debt, opposite outcomes — decided by a choice each sister made on her very first day.

That choice is the legal form of the business, and it is the subject of this lesson. It is invisible to customers, but it silently fixes three enormous things: how much of your own money is at risk if the business fails, how you are taxed, and how easily you can raise the capital to grow. Choose it carelessly and a profitable business can still ruin you.

2The sole proprietorship — watch one first

Uwase runs a tailoring shop by herself in Kicukiro. She registered the business in her own name, she keeps every franc of profit, and she answers to nobody but her customers. After a slow season the shop owes a fabric wholesaler 2,500,000 Frw. Everything the shop owns — two machines and the remaining stock — is worth only 1,600,000 Frw. The wholesaler is still owed 900,000 Frw. Because, in the eyes of the law, Uwase is the business, that 900,000 Frw is her personal debt. She must find it from her savings, or by selling her own property. Nobody separates ‘the shop’s money’ from ‘Uwase’s money’, because in law there is no such line.

Now the definition. A sole proprietorship is a business owned and run by one person, in which the owner and the business are the same legal entity. There is no separate ‘company’ standing between the owner and the world. The direct consequence of that is unlimited liability: the owner is personally responsible for every debt the business runs up, and personal assets can be taken to settle them.

Formation is the simplest of all four forms: you register the enterprise and its name with the Rwanda Development Board, which is free and usually done the same day, and you begin.

Merits. It is quick and cheap to start; the owner keeps all the profit; decisions are instant because only one person makes them; the accounts are private; and the owner deals with customers directly. Limitations. Unlimited liability puts personal property at risk; capital is limited to one person’s savings and what they can borrow; there is no continuity, so the business normally ends if the owner dies or stops; and one person carries the whole workload and supplies all the skills.

3The partnership

Gatete, Habimana and Ishimwe open a car-repair garage together and sign a partnership deed — a written agreement setting out who puts in what and who gets what. They contribute 2,000,000, 2,000,000 and 1,000,000 Frw, and agree to share profits and losses in the ratio 2 : 2 : 1. In the first year the garage makes a profit of 3,000,000 Frw. Split it: the ratio has 2 + 2 + 1 = 5 parts, so one part = 3,000,000 ÷ 5 = 600,000 Frw. Gatete and Habimana take two parts each = 1,200,000 Frw; Ishimwe takes one part = 600,000 Frw. Check: 1,200,000 + 1,200,000 + 600,000 = 3,000,000. Correct.

Now the danger. The garage later owes a parts dealer 1,500,000 Frw. Gatete and Habimana have spent everything and cannot pay. The dealer sues Ishimwe — the one partner with savings — and can lawfully recover the whole 1,500,000 Frw from him alone, even though Ishimwe only takes one-fifth of the profit. He must then chase the other two himself. This is called joint and several liability: each partner can be held responsible for the entire debt of the partnership, not just their share of it.

A partnership, then, is a business owned by two or more people who share the capital, profits, losses and management under a partnership deed. In a general partnership every partner has unlimited liability, jointly and severally. (A limited partnership is a variant that has at least one general partner with unlimited liability, plus limited partners whose liability is capped at what they put in — but limited partners are not allowed to help manage the business.)

Merits. More capital than one person could raise; the workload and the risk are shared; and partners bring different skills. Limitations. Unlimited and joint-and-several liability; profit must be shared; disagreements can slow or even break the business; and one partner’s actions legally bind all the others. Like the sole proprietorship, it usually lacks continuity.

4The company (limited company)

Return to Keza. She and two friends form a private limited company — call it Ikaze Hardware Ltd — and each buys shares in it. From that moment the shop is owned and run by the company, not by Keza. The company signs the supply contracts; the company owns the stock; the company’s name is on the door. So when the company owes 4,000,000 Frw and its assets are worth only 2,500,000 Frw, the creditors take the 2,500,000 and bear the remaining 1,500,000 Frw as their own loss. The company may be wound up, but Keza’s personal loss stops at the money she paid for her shares. Her house is never touched, because the company is a separate legal person from the people who own it.

That is the defining idea. A company is a business that the law treats as a legal person in its own right, distinct from its owners (the shareholders). It can own property, sign contracts, and sue or be sued in its own name. Its owners enjoy limited liability: the most a shareholder can lose is the amount they agreed to pay for their shares. Fully paid up, they can lose only what they invested — never their personal property.

There are two kinds you must know. A private limited company (Ltd) does not sell its shares to the public; it can have as few as one shareholder, and it is by far the commonest form for growing Rwandan businesses. A public limited company may offer its shares to the public and can be listed on the Rwanda Stock Exchange — Bank of Kigali and Bralirwa are listed examples. A company also has perpetual succession: it continues to exist even when a shareholder dies or sells out, because the owners are not the company.

Formation is done at the Rwanda Development Board, with articles of association and named shareholders and directors. Merits. Limited liability; far easier to raise large capital by issuing shares; perpetual succession; and the standing of a separate legal person, which banks and suppliers trust. Limitations. More costly and complex to set up; heavier regulation, including audited accounts and public filings; the profit is taxed as company income and dividends are taxed again; and because the owners (shareholders) may not be the managers (directors), their interests can pull apart — the ‘agency problem’.

5The cooperative

Around Lake Kivu, 300 small coffee growers each sell only a few sacks a year. Alone, one grower has no bargaining power against a large buyer and could never afford a coffee-washing machine. So they pool together into a cooperative. Each pays for a share: Habimana can afford only 30,000 Frw, while a larger grower puts in 300,000 Frw. The cooperative buys the washing station, processes everyone’s cherries, and sells in bulk at a far better price than any of them could get alone. At the annual meeting the members vote on what to do with the surplus — and here is the feature that makes a cooperative genuinely different from a company. Habimana, who paid 30,000 Frw, and the grower who paid 300,000 Frw each have exactly one vote. In a company, the second person’s ten-times-larger stake would give them ten times the votes.

A cooperative is a business owned and democratically controlled by the members who use its services, run on the principle of one member, one vote, regardless of how many shares a member holds. Any surplus is returned to members in proportion to how much they trade with the cooperative (their ‘patronage’), or is reinvested. In Rwanda, cooperatives are registered not with the RDB but with the Rwanda Cooperation Agency (RCA). The Umurenge SACCOs and the coffee and tea cooperatives are the everyday examples.

Merits. It pools the small resources of many; control is democratic; together the members gain real bargaining power and better prices; members’ liability is limited to their shares; and members gain access to inputs, markets and training. Limitations. Democratic decisions are slow; capital is limited because members are rarely wealthy; there is a real risk of weak governance or mismanagement; and the whole thing depends on members staying committed and honest.

6The four side by side

The whole lesson fits into one table. Read down the ‘Liability’ and ‘Legal personality’ rows first — they explain most of the others.

Notice the deal running through the whole table. As you move from left to right you gain protection from loss and the power to raise money — but you take on more rules, more cost and less private control. There is no ‘best’ form; there is only the form that fits how much capital you need and how much risk you are exposing yourself to.

Practice

Work each one out before reading the answer beneath it.

Answer. Shortfall = 3,200,000 − 1,900,000 = 1,300,000 Frw. Because a sole proprietor has unlimited liability and is the same legal person as the business, Byiringiro must pay it from his personal assets — his savings or his own property. There is no company to hide behind.

Answer. Parts = 3 + 2 = 5, so one part = 1,500,000 ÷ 5 = 300,000 Frw. The partners receive 3 × 300,000 = 900,000 Frw and 2 × 300,000 = 600,000 Frw. They add to 1,500,000.

Answer. At most 1,000,000 Frw — the money she paid for her shares. Because the company is a separate legal person and her liability is limited to her shares, the company’s 8,000,000 Frw debt is the company’s, not Keza’s. Her personal property is safe. That protection is the whole reason limited companies exist.

Answer. One vote each. A cooperative runs on one member, one vote, whatever the size of the shareholding. Had this been a company, Mutesi’s stake would have carried ten times Gatete’s voting power. This is the sharpest difference between the two forms.

Answer. A sole proprietorship. Her capital need is tiny and her risk of large debt is low, so unlimited liability barely matters here; meanwhile she keeps every franc of profit, decides everything herself, and pays almost nothing to start. Forming a company would cost and complicate far more than her situation calls for. Match the form to the size of the risk.