Advantages of formalising SMEs


LATELY calls have been made for small-to-medium enterprises to formalise their operations.
But what exactly is formalisation?
Business formalisation or registration and licensing is an important conduit to creating a thriving and robust business sector.
Registration enables businesses, particularly small ones, to gain access to funding and to protection by the law.
It also helps formalise the economy as registered businesses pay tax and deliver other important benefits to the economy, like job creation.
While there are attendant costs and difficulties in formalising small businesses, there are significant gains and benefits of formalising business set-up.
Invariably, formalising business will begin by registering a company to conduct or deliver the services or products that are set out.
The Indigenisation and Economic Empowerment Programme has led to the birth of many informal businesses.
However, failure to formalise has resulted in stunted growth of operations.
The small businesses have also failed to penetrate international markets as most do not possess ‘papers’ to operate at such a level.
Locally many have not benefited from lucrative Government tenders simply because they do not have requisite operating documents yet they have the capacity to deliver.
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.
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.
Market access
As you venture out for significant market opportunities like supermarkets or export to neighbouring countries, it is a pre-requisite to be a legally registered and tax compliant entity.
You may also fail to get barcodes registered directly to you due to lack of a formal certificate of registration.
Management of business operations
Formalisation goes beyond mere registration to aspects like how you run the business.
While you may be doing sales/marketing/operations/accounts at the start, as the operations grow, there is a need to hire professionals.
This may not mean full-time employees, but there are possibilities of outsourcing some of these services.
A two hours-a-week walk-in accountant will keep your books in order for a fraction of the cost, and a freelance sales agent, who earns on commission, will most likely increase sales at the least cost.
Tax compliance
With the noose tightening on the informal economy, it is just a matter of time before you are snared.
It is a known fact that when URA hardly finds any decent paperwork in place, they make exorbitant tax guesstimates and this is what tends to get some businesses onto their knees. The way out is to have formal operations in place such that a visit from the tax man does not spell doom.
There is also the ‘cat and mouse’ game you are likely to play with the local council authorities.
You can save yourself the headache.
In some circles, failure to have formalised business operations means a lack of credibility.
How do you expect to be trusted to handle an international transaction without any ability for your partners to legally confront your outfit?
Growth and continuity
If you have the expectation of seeing your business grow into something that could outlive you the founder, then it is crucial to formalise.
Additional information – Reforming Business Registration (2013), Facilitating the growth of Small Businesses in Africa (2015)


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