The opportunities that come with a formalised investment club outweigh the challenges that come with operating a business with no legal status. PHOTO | file
No it is common nowadays for individuals to come together and pool resources for business through
investment clubs.These clubs are gaining traction as alternative sources of finances for small and medium enterprises in a country where the uptake of banking services that can unlock access to credit is very low.
Investment clubs in Uganda are largely informal, without legal personality and only bound together by the trust the respective members have in each other.
They are, however, likely to be more transformative if they formalise their legal status.
In this article, we highlight some of the legal options for achieving this.
Legal form
An investment club can have separate legal personality from its members insulating them from the liabilities and obligations of the club.
The club can also exist without legal personality in which case its activities would be carried out through its members. In such instances, the club members usually designate a select few to act on their behalf including opening up bank accounts as well as holding club property.
These members are jointly and severally liable in respect of the obligations of the club activities.
Self-help groups
The law in Uganda recognizes the existence of investment clubs, though it refers to them as self-help groups.
Under the Tier 4 Microfinance Institutions and Money Lenders Act 2016, these groups can be started for purposes of mobilising and managing own savings, providing interest bearing loans to its members, offering a limited form of insurance to its members and sharing out member equity at least once a year in proportion to the savings.
Although the law requires these groups to be registered with respective local governments, this rarely happens.
Registration is intended to facilitate supervision of these clubs hence mitigating the mismanagement and misappropriation of funds.
It may also facilitate the transition of the group to a formal entity. Although a step in the right direction, this registration by the clubs or groups does not confer legal personality.
Company
An investment club can be established as a company. A company has separate legal personality thus shielding the owners from its liabilities and obligations.
There are several advantages running an investment club as a company though there are also additional regulatory compliance burdens.
Partnerships
An investment club can also be structured as a partnership. The formation and registration of partnerships in Uganda is governed by the Partnerships Act of 2010.
There are two types of partnerships namely general partnerships and limited liability partnerships.
General partnerships can have up to 50 partners for professional partnerships and 20 for non-professional partnerships.
All partners have unlimited liability and are jointly and severally liable in respect of the debts and obligations for partnership activities.
Limited liability partnerships (LLPs) consist of not more than 20 persons but have one or more persons called general partners.
The general partners are those responsible for the day-to-day management of the limited partnership and are liable for the company’s financial obligations, including debts and litigation.
An LLP must additionally have two or more persons called limited liability partners who must contribute a stated amount of capital to the firm and are not liable for the debts or obligations of the firm beyond the amount of the capital contributed.
Cooperatives
Investment clubs can take the form of Cooperatives. Cooperatives in Uganda are regulated under the Cooperative Societies Act Cap 112 and governed in accordance with the byelaws signed by the members.
Cooperatives are common with small holder farmers enabling them to market their produce collectively amongst others. Cooperatives are recognized as a legal entity.
Savings and Credit Cooperatives (Saccos)
Investment clubs can be organized as Saccos. Previously regulated under the Cooperative Societies Act, Saccos are now under the Tier 4 Microfinance Institutions and Money Lenders Act of 2016, which provides for the procedures for their formation, registration and management.
In order to undertake financial services such as lending, Saccos must seek authorisation from the Uganda Microfinance Regulatory Authority.
It is notable that Saccos are exempted from paying income tax on their commercial returns and also have legal personality.
As a company
An investment club can be established as a company with a separate legal personality thus shielding the owners from its liabilities and obligations.
Kakembo Managing Partner Cristal Advocates
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