Differences on taxation of companies and sole proprietors:

1. Rates of taxation

A sole proprietor business is taxed at the graduated rates (10% - 30%) on the profit. A sole proprietor is entitled to a tax relief (KShs 1,162 per month)

A company is taxed at flat rate of 30% on the profit. No tax relief available.


2. Deferral of taxation-

A sole proprietorship business income is fully taxed in the year the profit is made. ie all reserves in a sole proprietorship business are already taxed.

A company can retain reserves in its books which are taxed (by withholding tax) when dividend is paid to the shareholders.


3. Audit-

A company must be audited.

A sole proprietorship does not need to be audited.


4. Payment of tax-

A company pays the following taxes associated with Income - Corporation tax (By quarterly installment taxes) on the company income, PAYE on salaries and benefits to the directors/ employees, Withholding Tax on dividends paid.

A sole proprietorship only needs to pay quarterly installment taxes, if there are no external employees involved.

5. Other considerations-

The main consideration for trading as a company/ sole proprietorship is not really tax related but limitation of liability. As a sole proprietorship your creditors can attach your property, even that which is not related to business but as a company, the creditors only have recourse against the company property and any debts that you may owe the company.