IS your small business operating formally or informally? What are the benefits and costs associated with formalising your micro or small enterprise? What are the challenges?
These are all important questions faced by a vast majority of micro small and medium scale enterprises (MSMEs) in the economy, which are in most part operating as informal businesses.
The Finscope survey on the MSME sector estimated that there are 3,1 million MSMEs owned by 2,8 million individuals in the economy.
However, the vast majority of these MSMEs are operating as unregistered businesses. There are, however, significant gains to be made by partially or fully formalising one’s operations for both the economy at large and the businesses themselves.
While there are attendant costs and difficulties in formalising small businesses, which we will not dwell on in this article but in a future discussion, there are significant gains and benefits of formalising your business set-up.
Invariably, formalising your business will begin by registering a company to conduct or deliver the services or products that you set out to deliver. We will deal with the specifics of how to register a company again in a future article, but for today, we just need to highlight some of the merits of formalising your small business.
Creating a name for your business One of the chief advantages of registering a company is the fact that you can create a name that matches the service or product the company is in the business of delivering. Remember a company is a separate person and should gain its own personality and identity. This is the beginning of creating a unique brand for your company. A registered company also offers a level of legal liability protection to the owners through the concept of limited liability. A company is regarded as a separate legal entity to its owners or managers.
Developing a unique brand identity Having carefully chosen a name for your company, identify and create an associated logo or brand mark. This goes hand in hand with the name of the company. This will ensure that your company cannot and should not be confused for another. If your product or service is good, your business will more easily stand out among many.
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Building goodwill An unregistered entity will struggle to generate goodwill with clients and suppliers. For example, if you want to supply raw materials to larger companies or services or goods to government departments, you need to have a properly registered and compliant company.
Registered companies would rather deal with another registered company and not an individual. Registering your company and giving it a good name and unique identity will earn your business the respect of other businesses. Ironically, individuals who may be suppliers or customers of your business also prefer to deal with a registered company and would extend favourable terms of trade. Developing a sound banking relationship Banks generally require a business to be formally registered as a company with the registrar of companies before it can operate a business banking account. Further to this, your company will need an initial tax clearance certificate from the Zimbabwe Revenue Authority (Zimra).
Unless your business already has a trading record, this certificate is normally issued to certify that your business is a new business and has no previous accumulated tax liabilities. To get this certificate from Zimra also requires company registration documents.
While sole trader businesses are also allowed to open accounts, this sort of account is usually in the name of the owner and may not give the benefits accorded to company accounts, such as relative ease of access to loan facilities.
Accessing bank loans As a follow on to the above, banks and other financial institutions are less eager to deal with unregistered entities.
The more formal your business, in terms of record keeping and registration etc, the more likely your business will be attractive to a banker.
You may have a very viable business idea and it may be very profitable, but if your business is not very organised, you will find it difficult to convince your bank for support. Attracting new investors Having a properly registered business makes it easier to introduce new investors into the business as shareholders or creditors as the business grows.
Once your business has been registered with the registrar of companies, the company’s Articles of Association will normally spell out how such shareholder changes can be effected. It is also easy to draw up separate shareholders agreements in relation to a standalone company.
Managing growth, longevity and continuity A company being a separate legal entity can outlive its founders. One of the advantages of registering your business under a company is the continuity it can bring to your business. You do not always need to be around as the founder.
A company can also hire managers and other personnel in its own right to drive the company forward.
It is difficult to attract quality skills if your business is not duly registered and it may create legal issues in future. Having a duly registered company helps to more easily manage opportunities for growth and expansion that may arise in future such as attracting new investors.
Trade and local authority licences Local and regulatory licensing boards may require your business to be legally registered before you can be issued certain types of trading licences.
For instance, for your business to be on the register of suppliers to the government, the State Procurement Board deals only with properly registered and licensed companies as a legal requirement.
This list of benefits is by no means exhaustive or complete. In the next instalment, we will invariably discuss the myriad challenges and barriers that MSMEs are facing in formalising their businesses.
Clive Mphambela is a banker. He writes in his capacity as advocacy officer for the Bankers’ Association of Zimbabwe. BAZ expressly invites players in the MSME sector and all other stakeholders to give their valuable comments and feedback related to this article to him on [email protected] or on numbers 04-744686, 0772 206 913
