Top three mistakes entrepreneurs make when incorporating a business

When negotiating, engage in talks that do not leave you disadvantaged. FILE PHOTO | NMG

Mwangi got a scholarship to study in the US. While there, his good friend Patel called him. “I have an investment opportunity where you will be guaranteed a profit five times your investment within one year.”

The business idea fronted by Patel was a wellness restaurant whose unique selling point lay in delivering rental dishes to offices in Nairobi’s Westlands at an affordable price.

Patel put together a proposal for Mwangi to read through. Patel had no capital to contribute to the new venture but had prior experience in the hospitality sector having worked as a hotel manager in an Indian restaurant. Mwangi was, therefore, requested to contribute Sh600,000 as initial capital while Patel would run the business. They would then share the profit and revenues equally.

Mwangi had some extra cash to invest having sold his piece of land at Sh1 million. He desired to come back to Kenya after finishing his PhD. He thought that this was an excellent opportunity for him.

He trusted Patel having grown up with him and gone to the same schools with him. Furthermore, he knew that Patel was a highly sought-after restaurant manager. The business was in good hands, he thought to himself.

After a lot of back-and-forth they both settled on a name, Africa Meets Asia Dishes. Mwangi wired his contribution of Sh600,000 to Patel to start the business. After one month Patel sent Mwangi Sh10,000 being the first month’s profit. For the next six months, Mwangi did not hear from Patel again.

Patel blocked him on all social media sites and did not respond to his emails. Mwangi sought advice from a lawyer on his remedies.

Here are the top three mistakes Kenyans make when incorporating a business.

1. Not registering their businesses. Mwangi was not even sure if their business was registered. Registration of a business sets out the ownership rights of a business and the certificate can be provided as evidence in a court case.

2. Not having a proper business structure. It is important to incorporate the right business structure for the business. In Mwangi’s case, a company would have been best. Companies are regulated under the Companies Act. The Act contains sound remedies that could have been resorted to by Mwangi to enforce his rights as a co-owner of the business.

3. Not having a written agreement. Never trust a friend or even a sibling’s word on the viability of the business, the returns, the revenue sharing ratios, the responsibilities, and other elements without seeking professional advice. Getting legal advice from the onset will protect your investment.

Ms Mputhia is the founder of C Mputhia Advocates.

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