Establishing a Charitable Company in Kenya

Overview of Charitable Companies

A Charitable Company in Kenya is primarily set up for charitable, educational, religious, or social purposes. Unlike standard businesses, charitable companies do not aim to generate profit for distribution to shareholders; instead, any surplus income is reinvested into the organization’s charitable activities. They are usually registered as Limited by Guarantee companies, meaning they do not have shareholders but have members who guarantee to contribute a nominal amount towards the company’s liabilities if needed.

This structure offers limited liability protection and potential tax benefits but requires careful management and compliance with legal frameworks. Transparency and alignment with charitable objectives are essential for maintaining public trust and securing funding.

Key Features of a Charitable Company

• Non-Profit Purpose: The primary objective is to benefit the public or a specific community rather than making profits for private individuals or shareholders.
• Limited Liability: Members have limited liability, meaning their financial responsibility is limited to the amount they guarantee to contribute (usually a small nominal amount).
• Legal Status: It is a separate legal entity from its members and can hold property, enter into contracts, and be sued or sue in its own name.
• Governance Structure: Charitable companies are managed by a board of directors who oversee the organization’s activities, fundraising, and compliance with laws and regulations.
• Tax Exemption: Charitable organizations are often eligible for tax exemptions or reliefs, especially in areas such as income tax, VAT, and import duties, as long as their activities are deemed charitable.

Steps to Set Up a Charitable Company in Kenya

1. Determine the Charitable Objectives:
   • Define the charitable purpose or objectives of the organization. This could be anything from providing education, healthcare, alleviating poverty, to environmental conservation or religious activities.
   • Ensure that the purpose of the company is aligned with charitable goals, and include a clause in the company’s constitution that ensures profits will be reinvested into charitable activities, not distributed to members or directors.
2. Choose a Business Name:
   • The name of your charitable company must be unique and reflect its non-profit, charitable nature.
   • Name Search and Reservation: You can search for name availability and reserve it via the eCitizen platform (Business Registration Services - BRS).
3. Draft the Memorandum and Articles of Association:
   • Memorandum of Association: This document outlines the company’s objectives, scope, and powers. For a charitable company, this should clearly state that the business is set up for charitable purposes only and that it will not distribute profits.
   • Articles of Association: This document sets out the internal rules for managing the company, including the roles and responsibilities of directors, the governance structure, and how decisions are made. It should also clarify that upon dissolution, the assets will be transferred to another charitable organization or used for charitable purposes.
4. Register the Charitable Company:
   • Register with the Registrar of Companies: Charitable companies in Kenya are typically registered as companies limited by guarantee. You can complete the registration process via the eCitizen platform.
   • Submit the required documents, including the Memorandum and Articles of Association, name reservation certificate, identification documents of directors, and proof of the company’s registered office address. The company must have at least one director and one company secretary. These individuals must meet the legal requirements for their roles.
5. Apply for a KRA PIN:
   • Register the charitable company with the Kenya Revenue Authority (KRA) to obtain a KRA PIN. This will be used for tax purposes, even though charitable companies may be eligible for tax exemptions.
   • The company may need to register for VAT if its activities involve taxable transactions exceeding the threshold for registration.
6. Obtain a Charitable Status Certificate:
   • Charitable Status Registration: In Kenya, organizations wishing to operate as charities or receive tax exemptions may also need to register with the NGO Coordination Board if they wish to qualify for certain benefits (e.g., tax exemptions). The registration process involves submitting documents about the company’s objectives, governance, and activities. Charitable companies must ensure they comply with the requirements laid out by the NGO Coordination Board.
7. Open a Business Bank Account:
   • Open a bank account in the name of the charitable company. This account will be used to manage donations, grants, and any other funds the organization receives. Documents required include the Certificate of Incorporation, KRA PIN, and NGO Coordination Board registration (if applicable).
8. Apply for Tax Exemption:
   • Tax Exemption Application: A charitable company may apply for tax exemptions with the KRA on income generated for charitable purposes. This will involve submitting evidence that the organization is not operating for profit and that its activities meet the criteria for tax-exempt status.

Advantages of a Charitable Company

• Limited Liability: Members of the charitable company are not personally liable for the company’s debts, reducing personal financial risk.
• Legal Protection: As a separate legal entity, the charitable company can hold property, enter into contracts, and take legal action in its own name.
• Tax Exemptions: Charitable companies are often eligible for tax exemptions on income, donations, and other transactions directly related to their charitable activities.
• Access to Donations and Grants: Charitable companies can receive donations and grants from individuals, corporations, and international donors, which are typically tax-deductible for the donor.
• Public Trust: Being registered as a charity and operating transparently can help build public trust and credibility, which is crucial for fundraising and stakeholder engagement.

Disadvantages of a Charitable Company

• Strict Regulatory Requirements: Charitable companies are subject to strict regulatory oversight, particularly if they receive public funding or tax exemptions. They must adhere to specific reporting and governance standards.
• Limited Flexibility in Profit Distribution: Since charitable companies cannot distribute profits to members or directors, any surplus income must be reinvested in the organization’s activities, which limits how the organization can use its funds.
• Complex Setup and Maintenance: Setting up and maintaining a charitable company involves more paperwork and ongoing compliance compared to non-charitable businesses, especially in terms of transparency, reporting, and governance.
• Restrictions on Activities: Charitable companies must ensure that all their activities are in line with their charitable objectives and must not engage in profit-making ventures that do not further the charitable cause.

Ongoing Compliance and Management

• Annual Returns: Charitable companies are required to file annual returns with the Registrar of Companies to maintain their legal status. This typically includes updating company information, financial records, and directors’ details.
• Governance: Charitable companies must hold regular meetings, including Annual General Meetings (AGMs), to keep members and directors informed of the company’s activities and financial health.
• Financial Reporting: Charitable companies must maintain accurate financial records and may be required to submit audited accounts to demonstrate transparency and accountability.
• Tax Filing: Even though they may qualify for tax exemptions, charitable companies must still file tax returns with the KRA to comply with tax laws.