An Analysis of Different Social Impact Entities in Kenya

COOPERATIVE SOCIETY

A cooperative society by general definition is a type of organization that is formed by individuals with a common goal of promoting the welfare and economic interests of its members. Cooperative societies in Kenya are governed by the Cooperative Societies Act Cap 490.

Key Features of Cooperative Societies

1. Voluntary and Open Membership:

Inclusivity is key; membership is open to all without discrimination, fostering diversity and broad engagement.

2. Democratic Member Control:

The cornerstone principle: "one member, one vote." Ensures equal say in decisions, cultivating shared ownership.

3. Economic Participation by Members:

Active involvement in economic activities by members, emphasizing mutual benefit and shared prosperity.

4. Autonomy and Independence:

Cooperative societies operate autonomously, controlled by members, ensuring decisions align with members' needs.

5. Education, Training, and Information:

Commitment to member empowerment through continuous learning, providing knowledge and skills.

6. Cooperation Among Cooperatives:

Actively promotes collaboration and support among cooperatives, enhancing collective strength.

7. Concern for Community in General:

Goes beyond member interests; cooperatives actively contribute to community development and sustainability.

Pros of Cooperative Societies

1. Economic Growth:

Ideal for initiatives with a common economic goal, promoting collective growth and minimizing middlemen.

2. Commercial Activities:

Allows engagement in business ventures, fostering self-sufficiency, control, and long-term sustainability.

3. Financing through Loans:

Enables fundraising through loans, providing increased financing options, a unique feature compared to other social impact entities.

4. Member-Centric Governance:

Democracy in decision-making, empowering members to elect and remove leadership through a majority vote.

5. Versatility and Diversification:

Encourages pursuit of diverse objectives, aligning with economic and social values to enhance community well-being.

6. Member's Shares Protection:

Members' shares are safeguarded and cannot be used to settle debts, even in the case of bankruptcy.

Cons of Cooperative Societies:

1. Limited Scope

Primarily benefits registered members, limiting the scope to a specific group.

2. Tax Obligations:

Engaging in commercial activities subjects the cooperative to various taxes, including corporate income tax.

3. Over-Regulation:

Extensive regulatory control poses challenges to autonomy and flexibility, potentially affecting operational efficiency.

4. Limited Skill Enhancement:

Insufficient emphasis on improving managerial and financial abilities may hinder adaptation to complex challenges.

5. Inadequate Business Environment:

The current legal framework may not sufficiently support agile and strategic decision-making processes.

6. Restricted Profit Sharing:

Limitations on profit sharing with non-members could discourage potential collaborations and partnerships.

SACCOs (Saving and Credit Cooperative Organizations)

A SACCO is a specialized form of cooperative that primarily focuses on raising funds and providing cost-effective credit services to its members, who serve as both owners and users of the cooperative. Registered under the Cooperatives Act Cap 490, SACCOs are licensed and regulated by the SACCO Societies Act No. 14 of 2008, overseen by SASRA (SACCO Societies Regulatory Authority).

There are two types of SACCOs: deposit-taking and non-deposit-taking.

Deposit-taking SACCOs, functioning like savings and loan organizations, regularly accept deposits from members, using these deposits to provide loans or credit. This SACCO type assumes the risk of lending money, including giving out short-term loans.

Non-deposit-taking SACCOs collect savings from members, using them as security for loans given to members. Members cannot withdraw these deposits but can only get them back when leaving the SACCO. Non-deposit-taking SACCOs don't provide services like holding accounts for members to deposit or withdraw money.

Key Features of SACCOs

SACCOs, being a type of cooperative society, adhere to cooperative principles. Specifically for SACCOs, features include:

1. Financial Operations

SACCOs focus on financial activities, such as providing a platform for members to save money, accepting deposits, and investing funds in authorized channels like bonds and shares.

2.Financial Inclusion

SACCOs serve as microfinance institutions, offering alternative solutions to individuals excluded from mainstream banking. They provide relatively lower loan interest rates compared to banks, promoting financial inclusion.

3. Additional Licensing

Deposit-taking SACCOs must apply for a license from SASRA to ensure financial stability, protect consumers, and enforce regulatory compliance.

4. Publication of SACCOs

SASRA publishes a list of registered SACCOs annually in the Kenyan Gazette and a newspaper of nationwide circulation.

5. Prohibited Business

SACCOs can only engage in business activities prescribed by SASRA.

6. Both Internal and External Auditors:

Every SACCO must have both internal and external auditors to ensure transparency, regulatory standards, and member protection.

Pros of SACCOs

1. Lower Interest Rates on Loans

SACCOs offer loans at lower interest rates, promoting financial inclusion and reducing capital costs for social impact initiatives.

2. Quicker Access to Loans

SACCOs, with their member-centric approach, facilitate faster loan approval, enabling prompt response to community needs.

3. Financial Growth Through Investments:

SACCOs allow members to contribute savings, contributing to overall financial growth and supporting social impact initiatives.

4. Financial Empowerment of Members

SACCOs focus on economic empowerment, fostering member well-being and active participation in community projects.

Cons of SACCOs

1. Limited Scope

SACCOs are limited to financial services, hindering diversification. Their outreach is confined to members, limiting financial inclusion.

2. Inefficient Internal Regulatory Frameworks

Inadequate internal regulations can lead to operational and governance issues, risking financial mismanagement and trust loss.

3. Limited Resources: 

SACCOs often operate on tight budgets, limiting support services and technological advancements, and hindering broad social impact.

4. Higher Financial Risk

Member loan defaults due to economic fluctuations pose a significant challenge, jeopardizing financial stability and limiting support for social impact initiatives.

COMPANIES LIMITED BY GUARANTEE

A company limited by guarantee is a unique entity without shares. Members commit to contributing a specified amount to the company's assets in case of liquidation. Governed by the Companies Act No. 17 of 2015, it serves nonprofit purposes, allowing members to support shared goals with limited financial liability.

Key Features

1. Limited Liability of Members

 Members' liability is restricted to the agreed-upon contribution during liquidation.

2. No Share Capital

Unlike other companies, it doesn't require initial share capital. Funds are usually raised through contributions, donations, or grants.

3. Registration Vetting

During registration, members undergo vetting by the National Intelligence Service due to the nonprofit and potentially sensitive nature of associated activities.

4. Commercial Activities

Allowed, but profits must advance the organization's objectives and cannot be distributed to members. Taxes apply unless exempted.

Pros of Companies Limited by Guarantee

1. Diverse Financing Options

Flexible financing options, combining commercial activities, grants, and loans for enhanced financial sustainability.

2. Tax Exemption

Unique exemption from taxes on commercial activities if funds aim to advance charitable objectives.

3. Streamlined Administration

Simplified decision-making with two or three members, fostering quick, direct communication and efficient responses.

Cons of Companies Limited by Guarantee

1. Lengthy Registration Process

Takes 6-12 months due to detailed vetting, potentially delaying social impact initiatives.

2. Charitable but Tax Application

Despite nonprofit goals, a formal tax exemption application is required, adding to the time-consuming process.

3. Limited Donor Appeal

May face challenges in appealing to donors accustomed to traditional nonprofit structures.

4. Perception Challenges

Stakeholders may associate the corporate structure with profit-driven motives, affecting credibility.

5. Risk of Mission Drift

A potential shift from societal betterment to profit-driven goals requires a balance to maintain the core social impact objective.

TRUST

A charitable trust involves a three-way relationship where a settlor transfers property to trustees, tasked with managing it for beneficiaries. Governed by the Trustees (Perpetual Succession) Act CAP 164 in Kenya, charitable trusts focus on relieving poverty, advancing education, or serving public interests.

Features of a Charitable Trust

1. No Incorporation Requirement

Trusts can operate without incorporation, registered under the Registration of Documents Act. However, this limits their legal entity status.

2. Asset and property management

Charitable trusts prioritize responsible asset management for philanthropy, specifically funding societal benefits like education and healthcare, distinguishing them from other operational social impact entities.

3. Flexible Membership

Trusts can be registered by an individual or a group, requiring no minimum membership, and providing flexibility during registration.

4. Fiduciary Relationship

Creates a deep fiduciary relationship between trustees and beneficiaries, emphasizing honesty and responsibility in managing resources for societal benefit.

5. Beneficiary Flexibility

Unlike SACCOs and Cooperative societies, charitable trusts lack predefined beneficiaries, focusing on broad public benefit.

6. Adapting Charitable Intent

The Cy-Pres doctrine allows redirection of funds if the original charitable purpose becomes uncertain, adapting to unforeseen circumstances.

Pros and Cons of Charitable Trusts

Pros

1. Enhanced Accountability and Governance

The appointment of an enforcer ensures the enforcement of trust terms, enhancing accountability and governance.

2. Lesser Compliance Requirements

Charitable trusts are not mandated to remit annual reports, providing autonomy and flexibility in pursuing philanthropic endeavors.

3. Adaptive Impact

The Cy-Pres doctrine allows trusts to adapt to changing societal needs, ensuring sustained and impactful contributions to the community.

4. Tax Exemption and Deduction

Charitable trusts offer potential tax deductions and exemptions, encouraging financial support for charitable causes.

Cons:

1. Irrevocable in Nature

Charitable trusts are irrevocable, limiting flexibility as donors relinquish control over assets once transferred.

SOCIETIES

In Kenya, a "society" encapsulates clubs, partnerships, or associations with ten or more members, governed by the Societies Act Cap 108. Notable for their unique features, societies offer a distinctive platform for social impact initiatives.

Key Features of Societies

1. Inclusivity Beyond Borders

   - Definition includes foreign societies with a presence in Kenya.

 - Criteria involve a registered office, member register, subscriptions, and local member involvement.

2. Member-Centric Dynamics

   - Societies prioritize member involvement, fostering democratic decision-making.

   - Contrasts with NGOs and trusts, ensuring a collaborative and inclusive environment.

3. No Need for Registration

   - Societies can opt for exemption from registration within 28 days of formation.

 - Registrar, with Ministerial approval, may grant an exemption, showcasing organizational adaptability.

4. Distinct Winding-Up Approach

   - Unique procedures for solvent and insolvent societies under the Societies Act.

   - Highlights legal clarity in managing closure, a rarity in regulations for other social impact organizations.

Pros of Societies

1. Community-Centric Engagement

   - Prioritizes local participation in decision-making, cultural sensitivity, and community empowerment.

   - Fosters a sense of ownership and unity for sustainable development projects.

2. Body Corporate Status

   - Societies gain legal personality, facilitating contracts, property ownership, and legal accountability.

   - Establishes a solid foundation for effective and sustainable social impact initiatives.

3. Tax Advantages

   - Eligible for tax exemptions under the Income Tax and VAT Acts for public benefit activities.

   - Enhances financial sustainability for impactful endeavors in poverty alleviation, distress relief, education, and religion.

Cons of Societies

1. Overregulation Challenges

   - Compliance requirements and penalties for non-compliance may pose challenges.

   - Administrative burdens like filing annual accounts and strict limitations on official appointments may hinder agility.

2. Public Governance Interference

   - Public inspection and involvement in decision-making can result in bureaucratic hurdles.

   - Potential conflicts from wide-scale public participation may impact streamlined operations.

 

NATIONAL & INTERNATIONAL NON-GOVERNMENTAL ORGANIZATIONS (NGOs)

 National and International Non-Governmental Organizations (NGOs) are the bedrock of Kenya's social impact landscape. Defined by the Non-Governmental Coordination Act, NGOs operate either nationally or internationally, prioritizing public welfare across sectors like health, relief, and education. This analysis explores their distinctive features, advantages, and challenges, offering valuable insights for impactful decision-making.

Features of NGOs

1. Employee Entry Permits

NGOs navigate talent acquisition effortlessly, leveraging the NGO Coordination Act's provision for streamlined entry permits for foreign staff.

2. Exemption from Registration

Uniquely, NGOs can seek exemption from registration, allowing flexible organizational structures aligned with diverse social objectives.

3. Wider Scope/Reach 

National NGOs operate across Kenya, while International NGOs extend their impact to multiple countries, showcasing a broad operational canvas.

4. Tax Exemptions

NGOs enjoy a tax haven, exempt from income tax and VAT. International NGOs can further seek income tax exemptions for expatriate employees.

5. Body Corporate Status 

Upon registration, NGOs attain a legal personality as a body corporate, facilitating autonomous operations and accountability akin to corporate entities.

Pros and Cons of NGOs

Pros

1. Wider Reach

NGOs- national and international, possess a legal mandate for expansive operations, reaching diverse communities, and engaging in cross-border initiatives.

2. Donor's Darling

NGOs are preferred by donors due to stringent oversight and governance by the NGO Board, ensuring transparency and accountability in impactful endeavors.

3. Global Talent Access

NGOs can effortlessly bring in global expertise with special entry permits for foreign staff and provisions for income tax exemptions for expatriate employees.

Cons

1. Complex Registration 

NGOs face a complex and lengthy registration process, demanding extensive documentation and information, necessitating expert assistance.

2. Overregulation

Rigorous regulations, while enhancing accountability, burden NGOs with annual reports and audits, diverting resources from direct social work.

3. Public Interference

Unwanted public scrutiny exposes NGOs to document inspections, and having a larger management structure potentially delays decision-making and execution of impactful initiatives.

COMMUNITY GROUPS

 Under the Community Groups Registration Act No. 30 of 2022, Community Groups, comprising Community-Based Organizations (CBOs) and Self-Help Groups, emerge as voluntary associations self-organized for communal betterment. Governed by the Act, they operate under the guidance of the Director of Social Development, County Coordinator, and Social Development Committee at national, county, and sub-county levels, respectively.

Key Features

1. Community-Centered

   - Originating from shared local interests.

   - Focused on grassroots initiatives and local community development.

2. Merger & Amalgamation Provisions

   - Distinct ability to merge or amalgamate.

   - Formalized process enhancing collaboration and consolidation.

3. Elaborate Dispute Resolution

   - Internal mechanisms for resolving disputes.

   - Hierarchical referral for inter-group conflicts, ensuring fair resolutions.

Pros and Cons of Community Groups

Pros:

1. Diverse Fundraising Options

   - Flexibility in investing, raising, and borrowing funds.

   - Versatility for pursuing social impact goals.

2. Relaxed Compliance Requirements

   - Biennial reporting reduces administrative burdens.

3. Easier & Faster Registration

   - Expedited 14-day registration with cost-effective fees.

   - Streamlined process encourages widespread community registrations.

4. Preferred by Donor Partners

   - Growing preference for grassroots impact.

   - Recognition of authenticity and direct community connection.

Cons of Community Groups

1. Limited Scope

   - Geographical confinement to specific counties.

   - Operational boundaries may limit broader social impact.

2. Operational Constraints

   - Challenges in organizational capacity and funding.

   - Limited scalability due to reliance on volunteer efforts.

   - Resource access challenges compared to more established entities.

COMPANIES LIMITED BY SHARES

 Companies Limited by Shares, governed by the Companies Act No. 17 of 2015, signify a distinct corporate structure where members' financial obligations are confined to unpaid share values. They are regulated by diverse bodies based on their industry focus.

Key Features

1. Memorandum & Articles of Association

   - These are legal frameworks outlining the company’s goals and operations.

   - They serve as a guide for social impact missions and operational guidelines.

2. Share Capital

   - Represents the total value of shares issued by the company.

   - Financial foundation for social impact initiatives through investor contributions.

3. Board of Directors

   - Governance is by directors appointed by shareholders. The directors have a fiduciary responsibility for strategic direction and decision-making.

4. Limited Liability

   - Directors' financial exposure is limited to their unpaid shares. This mitigates personal financial risks in the face of company obligations.

5. Body Corporate

   - A company limited by shares gains legal recognition as a separate entity from individual members. It can own property, enter contracts, and engage in legal transactions independently.

6. Profit Distribution

   - Shareholders receive dividends based on shareholdings. This balances financial stability with social impact goals.

7. Payment of Taxes

   - They are legally mandated to pay taxes based on profits. These include: withholding tax, corporate income tax, Value Added Tax, etc.

Pros and Cons of Companies Limited by Shares

Pros:

1. Financial Sustainability

   - Flexible financing through income generation and profit distribution. It’s a self-sustaining model that reduces dependence on external funding.

2. Internal Autonomy

   - Shielded affairs from excessive public intrusion.

   - Streamlined decision-making and effective governance.

3. Faster and Easier Registration

   - Online registration with straightforward requirements.

   - Certificate of registration obtained within one to three weeks.

4. Wider Geographical Reach

   - Operational flexibility to expand reach.

   - Ability to operate in multiple locations for broader social impact.

Cons:

1. Huge Tax Burden

   - Mandatory tax remittance without exemption.

   - Diverts resources from social impact objectives.

2. Complex Regulatory Requirements

   - Intricate compliance demands and regular financial reporting.

   - Time-consuming and resource-intensive regulatory landscape.

3. Limitation on Grants and Donations

   - Inability to receive philanthropic contributions which restricts financial flexibility compared to donation-friendly structures.

LIMITED LIABILITY PARTNERSHIPS

A Limited Liability Partnership (LLP) is a distinct form of partnership regulated by the Limited Liability Partnership Act No. 42 of 2011, falling under the jurisdiction of the Registrar of Companies. Partnerships, as per the Partnerships Act Cap 29, constitute individuals engaged in a joint business venture with a profit motive.

Key Features:

1. Body Corporate

   - An LLP exists as a separate legal entity, capable of legal actions and perpetual succession.

   - Empowered to acquire, hold, develop, or dispose of property independently.

2. Limited Liability

   - Partners enjoy protection from personal liability, fostering the attraction of skilled partners.

   - Enables focus on social impact without personal financial anxieties.

3. Partners as Agents

   - Each partner serves as the agent of the partnership.

   -Actions within the partner's authority bind the LLP, defining responsibility and accountability.

4. Different Tax Payment Requirements

   - Taxes are individually paid by each partner, akin to employees, avoiding corporate income tax. This offers tax efficiency with the income of individual partners being taxed.

Pros and Cons of LLPs

Pros:

1. Fewer Compliance Requirements

   - Flexibility in internal organization reduces formal procedural burdens.

   - Swift decision-making through informal unanimous agreements.

2. Flexible Management

   - Flexible internal governing structure.

   - Partners customize roles through registered partnership agreements.

3. Diverse Finance Options

   - Legally mandated commercial ventures enable income generation.

   - Self-sufficiency for sustainable social impact activities.

4.Limited Liability Protection

   - Partners' assets shielded from business debts.

   - Ensures a secure environment for social impact ventures.

5 . Flexible Profit Distribution

   - Customizable profit distribution aligns with mission and operational needs.

   - Adaptability for tailored financial structures.

6. Perpetual Succession

   - LLPs have perpetual succession, ensuring continuity.

   - Stability for long-term social impact projects despite partner transitions.

Cons:

1. Hefty Registration Fees

   - LLPs incur high registration fees, challenging for startups in social impact initiatives.

2. Easily Dissolved

   - Requires a minimum of two partners; dissolution risk if one partner leaves.

   - Finding a replacement crucial to prevent dissolution in partner transitions.

In conclusion, choosing the right legal structure for your social impact venture is a crucial step in realizing your mission. Each entity discussed presents unique features, advantages, and challenges. Whether you opt for the community-focused Community Group, the globally collaborative NGO, or the flexible Limited Liability Partnership, it's vital to align your choice with your objectives. For personalized guidance on selecting and establishing the ideal social impact entity for your venture, reach out to us at info@valariewaswa.com

Let's transform your vision into an impactful reality together.

About the Author

Valarie Waswa is a lawyer by profession, an Advocate of the High Court of Kenya and East Africa by extension, and the Founding Partner of Valarie Waswa & Co. Advocates

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