Do I or do I not register a business entity?
The choice of how to structure a business is one of the most important decisions not only for small businesses but for existing and large corporations looking for new investments or for foreign companies or individuals seeking to do business in Ghana.
Before you set out to do any business, it is important to know the type, structure, requirements, regulations, and governance as well as the tax applicable to the different business entities in Ghana to enable you to decide on which entity will give you the best returns or results for your business. It is also best to consider alternatives to incorporating or registering an entity in Ghana for maximum benefits with lower costs.
Business Entities in Ghana
Depending on your business needs there are 6 main types of legal entities you may form in Ghana:
1. Company Limited by Shares
This is a business entity registered at the Registrar General’s Department (“RGD”) with objects which are usually for the generation of profit. The liability of the members of this entity is limited by the value of their shares. To register this company, you will need: (a) at least one person (company or individual) acting as a shareholder in the entity; (b) at least two individuals acting as directors of the company; (c) a company secretary; (d) an external Auditor; (e) a business location/office address and comply with the keeping of (f) statutory books, (g) filing of annual returns, etc. Huge taxes are also charged and imposed on the entity, the owners, directors, assets, and employees.
Unless an industry regulation specifies the need for a limited liability company such as in the banking sector, this type of business entity is not advisable for micro, small and medium-size enterprises (MSMEs). This is because compliance with the many requirements for a limited liability company is costly and the non-compliance attracts liabilities. A large-scale business can afford to comply and also employ a compliance officer to ensure it is compliant and has no liability. A micro, small or medium-size company on the other hand cannot bear such costs and, therefore, is not a good option. Unfortunately, in Ghana, many companies have been registered as limited liability companies with zero compliance leaving them with huge liabilities.
Just last week, a food vendor needed our assistance because he registered a limited liability company and has not filed any returns with the RGD for the 6 years it has been in operation. He did not know about this requirement and now the RGD is threatening to close down the business.
2. Company Limited by Guarantee
This company structure is best suited for Not-For-Profit Organisations. This is because a company limited by a guarantee cannot engage in any business for the generation of profit. As such these companies (upon certain conditions) are exempt from corporate tax, although the organization will have to pay income tax on behalf of any of its salaried workers. The liability of members of such a company is limited to the value of their guarantee which in most cases is not paid until the event of a winding-up.
The requirements for registering a company limited by guarantee are the same as a limited liability company. The only difference is that one makes profits for its members and the other does not. Registering a company limited by guarantee also helps businesses to obtain funding, donations, and grants for their operations which is not the case for a limited liability company.
3. Company Unlimited by Shares
This is a business entity registered at the RGD comprising at least two individuals acting as directors of the company and at least one person (company or individual) acting as a shareholder in the entity with objects which are usually for the generation of profit. The liability of the members of this entity is not limited by the value of their shares. It is typically used for entities that give professional advice and services such as law firms for instance. An unlimited liability company pays taxes in the same way as a limited liability company.
4. Sole Proprietorship
This is an entity exclusively owned by an individual who is entitled to all the profits of the business and personally liable for all liabilities of the business. In Ghana, such entities are not required to be incorporated at the RGD. If the owner of this entity would like to operate under a business name different from its personal name, it shall be required to register such a business name at the RGD. There is no need for directors, auditors, a company secretary, or filing of annual returns. The only requirement is to renew your business name annually if you’ve registered any. There are no corporate governance requirements for this type of business and fewer external controls. Lower taxes are imposed on the owner and assets of the business.
Operating a sole proprietorship business gives the owner the flexibility to take decisions without consultation and makes it the best fit for a new business or new investment.
5. External Company
An external company is a corporate body incorporated outside of Ghana which seeks to register a place of business in Ghana. Although an external company is subject to Ghanaian tax laws (income & corporate tax), such a company is regulated by the laws of the country in which it was originally incorporated. This is best suited for foreign companies intending to undertake a project or an investment in Ghana. An external company needs a local manager who will act on its behalf in Ghana.
6. Incorporated Partnership
Where two or more people (up to a maximum of 20) decide to go into business for the generation of profit together, they may decide to do so through an incorporated partnership registered at the RGD. Although this provides many benefits to the partners, there is no protection of a partner’s personal assets in an incorporated partnership and the acts of one partner bind the whole partnership. Taxes are also imposed on the individual partners and the business.
Incorporated partnerships are not very common in Ghana but this is one best entities for crowdfunded projects and is highly recommended for high-value projects such as farming, plantation, construction, oil and gas, small-scale mining, fishing, manufacturing, and international trading. This business structure enables the partners to contribute to the huge capital need of the business for a share of revenue generated. Partners are also able to share or bring onboard their expertise and experiences for the success of the projects.
Alternatives to Business Registration
If you want to avoid the high cost of registering and operating a business, you may want to consider any of the following commercial transactions as an efficient alternative to incorporating or registering an entity in Ghana and practically anywhere else:
1. Joint venture (JV) arrangements
A JV is a business arrangement in which two or more parties agree to pool their resources together for any business activity. JVs can be used for large or small projects. An individual or organization intending to do business in Ghana without registering or incorporating an entity may find an already existing entity in Ghana and enter into a JV with that entity for the intended business object. A JV with a non-resident will have to be registered with the Ghana Investment Promotion Centre (GIPC) to allow for the free transferability of funds to the foreign investor. Local JVs do not need any such registration.
2. Franchising
Franchising is a common business model for international trading. Under franchising, a business with a built brand and business system enters into an arrangement with a local entity for the use of the brands and business systems at a fee and payment of royalties. Foreign entities intending to do business in Ghana, especially under the Africa Continental Free Trade Area (AfCFTA) can do so through a franchise without the necessary need to register or incorporate an entity in Ghana. Local entities may use franchising to expand into other regions or markets in Ghana.
3. Distribution Arrangements
A manufacturer or seller of goods may enter into distribution agreements with major distribution businesses or distributors in Ghana without having to register an entity. A distribution agreement is a contract between a supplying company with products to sell and another company that markets and sells the products. The distributor agrees to buy products from the supplier company and sells them to clients within certain geographical areas. Distribution arrangements may be for a commission; it may be exclusive or maybe for wholesale purchases only. The parties are allowed to agree on terms that will be suitable and would yield the most returns.
4. Agency Arrangements
Unlike a distributor who is an independent contractor, an agent is an intermediary you appoint to negotiate and, if required, conclude contracts with customers on your behalf so you have the contract with the customer. Agents are paid commission on the sales they make, usually on a percentage basis. Many international businesses especially in the tech industry use agency arrangements to sell their products in different jurisdictions.
5. Online Business
Unless it involves a regulated product or service, one does not need to incorporate a business to engage in any business online. The use of online trading platforms, software applications, websites, social medial platforms, and other virtual means has created a massive enabling environment for doing business not only locally but internationally and in a cost-efficient and timely manner. Other than the newly passed Electronic Transfer Levy Act, 2022 (Act 1075) in Ghana which applies to electronic transactions, there seem to be no direct taxes that apply to virtual businesses in Ghana (as opposed to registered businesses that engage in business online, such registered businesses are assessable to tax).
Many other alternatives exist. You should engage a local advisor to assist with the best alternative and structure for your business.
Conclusion
The knowledge and understanding of the different business entities and available alternatives do not only give you an upper hand in structuring your business and projects but help you to avoid regulatory costs, risks, and external influences for maximum returns.