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Bellmac Consulting Zambia > Blogs > News & Alerts > Different Business Entities in Zambia

Different Business Entities in Zambia

Introduction

Zambia, like many other countries, has several types of business entities that entrepreneurs can choose from when starting a business. The type of business entity that is chosen will have implications for the way the business is run, how profits are shared, and the level of legal and financial liability that the owners will face. This simple yet insightful article highlights the most common types of business entities in Zambia and provides a brief feature of the advantages and disadvantages of each type of entity.

1.  Sole Proprietor
A sole proprietorship is a type of business entity where an individual owns and operates a business. This is the simplest form of business entity and does not require any formal registration with the government, however, sole proprietors are encouraged to formally register their businesses with the Patents and Companies Registration Authority (“PACRA”). The owner has complete control over the business, but also bears all the risks and liabilities associated with the business.

Advantages
a. Easy to set up:
One of the biggest advantages of a sole proprietorship is that it is easy to set up. You don’t need to file any legal documents or pay any fees to start operating as a sole proprietor.

b. Complete control:
As a sole proprietor, you have complete control over your business. You can make all the decisions yourself, without having to consult with anyone else.

c. Flexibility:
Sole proprietors have a lot of flexibility in terms of how they run their business. They can change their business model, expand or contract their operations, and make other changes quickly and easily.

d. Tax benefits:
Sole proprietors are not required to pay corporate taxes. Instead, they report their business income and losses on their personal tax returns, which can result in significant tax savings.

 e. Easy organizational structure:
It does not require sophisticated and intricate organizational structures.

Disadvantages
a. Unlimited liability:
One of the biggest disadvantages of a sole proprietorship is that the owner has unlimited personal liability for the business’s debts and obligations. This means that if the business is sued or goes bankrupt, the owner’s personal assets are at risk.

b. Limited resources:
Sole proprietors often have limited resources to invest in their business. They may struggle to secure financing or attract investors, which can make it difficult to grow or expand their operations.

c. Limited expertise:
Sole proprietors are often responsible for all aspects of their business, from sales and marketing to accounting and bookkeeping. This can be challenging if the owner lacks expertise in certain areas.

d. Limited lifespan:
A sole proprietorship is tied to the life of the owner. If the owner dies or becomes incapacitated, the business may not be able to continue operating.

2. Partnership
A partnership is a type of business entity where two or more people share ownership of a business. A partnership is the next step up from the sole proprietorship in terms of simplicity and of facilitating the growth of a business. Partnerships are very flexible form of business entity. Partnerships are governed by the Partnership Act 1890 which defines a partnership as “the relationship which subsists between persons carrying on a business in common with a view of profit”. It is of interest to know that a corporation can be a partner in a partnership, that is, a company or a legal person. A partnership can either be formal or informal.

Advantages

a. Shared responsibilities:
One of the biggest advantages of a partnership is that responsibilities and workload can be shared between partners. This can help to reduce the burden on any one individual and enable the business to operate more efficiently. 

b. Shared financial resources:
Partnerships can benefit from the shared financial resources of all partners, which can make it easier to secure financing, purchase equipment, and invest in the business.

c. Complementary skills:
Partnerships can bring together individuals with complementary skills and expertise, which can help to enhance the overall capabilities of the business. 

d. Privacy:
A partnership enjoys considerable privacy regarding how its operations are undertaken such as, the partners’ capital contributions, the financial status and the accounting records.

Disadvantages

a. Unlimited liability:
Like sole proprietors, partners in a partnership have unlimited personal liability for the business’s debts and obligations. This means that if the business is sued or goes bankrupt, the partners’ personal assets are at risk.

b. Shared decision-making:
Partnerships require shared decision-making, which can sometimes result in disagreements or conflicts. Partners may have different opinions on how to run the business, which can lead to tension or even the dissolution of the partnership.

c. Joint and several liability:
Partners in a partnership are jointly and severally liable for the debts and obligations of the partnership. This means that each partner is responsible for the full amount of the partnership’s debts and obligations, not just a proportionate share.

d. Limited lifespan:
Like sole proprietorships, partnerships are tied to the life of the partners. If one partner dies or leaves the partnership, it may be difficult to continue operating the business.

3. Company Limited by Shares
A company limited by shares is a type of business entity where the business is owned by shareholders who have purchased shares in the company. The shareholders elect a board of directors to manage the business on their behalf. The shareholders have limited liability, which means that they are not personally responsible for the debts and obligations of the company beyond the amount of their investment.

Advantages

a. Limited liability:
One of the biggest advantages of a company limited by shares is that the shareholders have limited liability for the company’s debts and obligations. Their liability is limited to their shareholding.

b. Separate legal entity:
A company limited by shares is a separate legal entity from its shareholders. This means that it can enter into contracts, own assets, and sue or be sued in its own name.

c. Perpetual existence:
A company limited by shares has perpetual existence, meaning it can continue to exist even if the shareholders change or pass away.

d. Easier access to financing:
Companies limited by shares may find it easier to access financing from banks or investors, as they have a more established legal structure and are considered more stable than other forms of business entities.

Disadvantages
a. Complex legal requirements:
Companies limited by shares have more complex legal requirements than other forms of business entities. They must comply with legal regulations regarding the formation of the company, share issuances, shareholder meetings, and other corporate governance matters.

b. Higher costs:
Companies limited by shares may be more expensive to set up and operate than other forms of business entities. They may require legal and accounting services to ensure compliance with legal regulations.

c. Less control:
Shareholders in a company limited by shares may have less direct control over the day-to-day operations of the business than in other forms of business entities.

d. More public scrutiny:
Companies limited by shares must file annual financial statements and other public disclosures with government regulatory bodies. This can result in more public scrutiny and less privacy than other forms of business entities.

4. Company Limited by Guarantee
A company limited by guarantee is a type of business entity that is similar to a company limited by shares, but instead of having shareholders, it has members who guarantee to contribute a certain amount of money in the event that the company is wound up. The members elect a board of directors to manage the business, but they do not receive any dividends or profits from the company.

Advantages
a. Limited liability:
Like a company limited by shares, a company limited by guarantee offers limited liability that is, the liability of the members is limited to the amount guaranteed.

b. Separate legal entity:
A company limited by guarantee is a separate legal entity from its members. This means that it can enter contracts, own assets, and sue or be sued in its own name.

c. Perpetual existence:
A company limited by guarantee has perpetual existence, meaning it can continue to exist even if the members change or leave the entity.

d. Charitable status:
A company limited by guarantee can be registered as a charity, which can offer tax benefits and attract donations from the public.

Disadvantages
a. Complex legal requirements:
Companies limited by guarantee have more complex legal requirements than other forms of business entities. They must comply with legal regulations regarding the formation of the company, membership, and other corporate governance matters.

b. Higher costs:
Companies limited by guarantee may be more expensive to set up and operate than other forms of business entities. They may require legal and accounting services to ensure compliance with legal regulations.

c. Limited funding options:
Companies limited by guarantee may have limited funding options compared to other forms of business entities. They cannot issue shares, which can limit their ability to raise capital.

d. Less control:
Members in a company limited by guarantee may have less direct control over the day-to-day operations of the business than in other forms of business entities

 5. Cooperative Societies
A cooperative is a type of business entity where the business is owned and controlled by its members, who share in the profits and benefits of the business. Cooperatives can take many different forms, including agricultural cooperatives, consumer cooperatives, and worker cooperatives. In Zambia, cooperatives are governed by the Cooperative Societies Act.

Advantage
a. Shared ownership:
One of the biggest advantages of a cooperative society is that it is owned and democratically controlled by its members. This can help to ensure that the business operates in the best interests of its members.

b. Limited liability:
Members of a cooperative society have limited liability for the debts and obligations of the business. Their liability is limited to the amount of money they have invested in the cooperative.

c. Shared financial resources:
Cooperatives can benefit from the shared financial resources of all members, which can make it easier to secure financing, purchase equipment, and invest in the business.

d. Social benefits:
Cooperatives are often formed to provide social benefits to their members and the community. For example, a cooperative might be formed to provide affordable housing or access to healthy food

Disadvantages
a. Limited funding options:

Cooperatives may have limited funding options compared to other forms of business entities. They cannot issue shares, which can limit their ability to raise capital.

b. Limited growth potential:
Cooperatives may have limited growth potential compared to other forms of business entities. They are often focused on serving the needs of their members, rather than expanding into new markets.

c. Shared decision-making:
Cooperatives require shared decision-making, which can sometimes result in disagreements or conflicts. Members may have different opinions on how to run the business, which can lead to tension or even the dissolution of the cooperative.

d. Limited expertise:
Members of a cooperative may have limited expertise in certain areas, which can make it difficult to run the business effectively.

6. Public Limited Company
A public limited company is a type of business entity that is similar to a company limited by shares, but it can offer its shares to the public and is subject to more stringent regulatory requirements. In Zambia, public limited companies that are listed are regulated by inter alia the Securities and Exchange Commission and must comply with the Securities Act and the Lusaka Stock Exchange listing rules.

Advantages
a. Limited liability:
One of the biggest advantages of a public limited company is that it offers limited liability protection to its shareholders. Their liability is limited to the amount of money they have invested in the company, so their personal assets are protected.

b. Separate legal entity:
A public limited company is a separate legal entity from its shareholders. This means that it can enter into contracts, own assets, and sue or be sued in its own name.

c. Easier access to financing:
Public limited companies may find it easier to access financing from banks or investors, as they have a more established legal structure and are considered more stable than other forms of business entities.

d. Increased public visibility:
Public limited companies are required to file annual financial statements and other public disclosures with government regulatory bodies. This can increase public visibility and help to establish the company’s reputation.

Disadvantages
a. Complex legal requirements:
Public limited companies have more complex legal requirements than other forms of business entities. They must comply with legal regulations regarding the formation of the company, share issuances, shareholder meetings, and other corporate governance matters.

b. Higher costs:
Public limited companies may be more expensive to set up and operate than other forms of business entities. They may require legal and accounting services to ensure compliance with legal regulations.

c. Less control:
Shareholders in a public limited company may have less direct control over the day-to-day operations of the business than in other forms of business entities.

d. Increased public scrutiny:
Public limited companies must file annual financial statements and other public disclosures with government regulatory bodies. This can result in more public scrutiny and less privacy than other forms of business entities.

7. Non-Governmental Organizations (NGOs)
Non-governmental organizations (NGOs) are a type of non-profit organization that is focused on promoting social, environmental, or humanitarian causes. NGOs can take many different forms, including community-based organizations, advocacy groups, and international development organizations. In Zambia, NGOs are governed by the Non-Governmental Organizations Act 16 of 2009.

Advantages
a. Social impact:
NGOs are often formed to address social issues or provide services to underserved communities. They can have a significant impact on the lives of individuals and communities.

b. Flexibility:
NGOs can be structured in a variety of ways, depending on the needs and interests of their constituents. They can be formal or informal, and can operate at the local, national, or international level.

c. Independence:
NGOs are often independent of government or commercial interests, which can allow them to pursue their mission without undue influence or interference.

d. Volunteerism:
NGOs often rely on volunteers to help carry out their mission. This can provide opportunities for individuals to contribute to social causes and gain valuable experience.

Disadvantages
a. Limited funding:
NGOs may have limited funding, which can make it difficult to achieve their mission. They may struggle to secure funding from donors or government agencies or may face competition from other organizations for limited resources.

b. Limited scope:
NGOs may have a limited scope, focusing only on specific issues or communities. This can make it difficult to expand into new areas or address broader social issues.

c. Limited accountability:
NGOs may have limited accountability to their stakeholders or to external oversight. This can make it difficult to ensure that the organization is operating in the best interests of its constituents.

d. Limited resources:
NGOs may have limited resources, which can make it difficult to attract and retain qualified staff or to invest in infrastructure or technology.

8. Clubs and Societies
The Clubs Registration Act, Cap 162 regulates the registration and operation of clubs in Zambia. It provides that for a club to be registered it must have a minimum of 25 members and the club must have premises. The purposes for registering a club vary, and may include philanthropic, charitable and religious causes and other extracurricular activities such as sporting activities are a few to mention. However, pertinent to note is that political parties also fall under the definition of a club. The registration of a club is with the Registrar of Societies.

Advantages
a. Shared interests:

Clubs and societies are formed around shared interests, which can help to foster a sense of community and belonging among members.

b. Flexibility:
Clubs and societies can be structured in a variety of ways, depending on the needs and interests of the members. They can be formal or informal and can meet regularly or intermittently.

c. Low cost:
Clubs and societies can be relatively low cost to set up and operate, as they do not typically require formal legal registration or financial reporting.

d. Personal growth:
Clubs and societies can provide opportunities for personal growth and development, as members may have the opportunity to learn new skills, develop leadership abilities, and expand their social networks.

Disadvantages
a. Limited resources:
Clubs and societies may have limited resources, which can make it difficult to achieve their goals. They may struggle to secure funding, attract new members, or access needed resources.

b. Limited scope:
Clubs and societies may have a limited scope, focusing only on the interests and needs of their members. This can make it difficult to expand into new areas or attract new members.

c. Limited structure:
Clubs and societies may lack a formal structure or governance, which can make decision-making and conflict resolution challenging.

d. Limited accountability:
Clubs and societies may have limited accountability to their members or to external stakeholders. This can make it difficult to ensure that the entity is operating in the best interests of its members.

Conclusion
In conclusion, there are several types of business entities that exist in Zambia. The type of business entity that is chosen will depend on several factors, including the objectives or reasons for forming the business entity, the size and complexity of the business, the level of control that the owners intend to have, and the level of legal and financial liability that the owners are willing to assume. It is important for persons to carefully consider their options and seek professional advice from a skilled lawyer before choosing a business entity that is right for them.