Choosing the Right Company Structure

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You have the idea, you have the passion and the know-how, you may already be up and running but do you know the appropriate kind of business structure to suit your business and your pocket? Choosing the right format of business ownership has to be informed by your future goals, as much as by the current width of your wallet.

What is your vision for the business in the medium to long term? A family-run restaurant is one thing, a growing franchise food outlet is quite another. What is your exit strategy? Yes, unless you want to die at the till, when and how would you like to hand over the baton and put your hard earned cash into a retirement villa in Plett?

There are many considerations when deciding on the right type of business entity, depending on the nature, size, and potential of the business. There are also cost, tax, financing, the difficulty of administration and legal considerations, even implications for your family and the business in the event of your death or insolvency. It is advisable to seek legal advice or to consult an accountant before leaping into a particular form of ownership which may prove costly in the long run.

The common for-profit business entities that will apply to most small businesses are:

  • Sole Proprietors: the business and the owners are one and the same. There is no separate legal identity. This is the cheapest and easiest way to begin and end business as it does not need to be registered. The person operates and contracts in his/her personal capacity and is liable for all debts incurred by the business.

  • Partnership: is an association for gain between 2 or 20 partners. Each partner must contribute to the business according to the agreement. There is no separate legal identity from the partners.

    A private company:  is an association of 1 or more persons for profit and it is regulated by the Company Act 71 of 2008. It must have a Memorandum of Incorporation, a Shareholders agreement and “Proprietary Limited (Pty Ltd)” is added to the name. It is a separate, juristic person capable of contracting in its own name.

Advantages and disadvantages at a glance:

  • Entity
  • Business Ownership / Structure
  • Advantages
  • Disadvantages

Sole Proprietor

 

1 natural person

  • Cheap and easy to set up and dismantle
  • Not regulated by the Companies Act because of not a separate legal persona. Limited legal and auditory regulation
  • The owner has full control
  • The owner sets up accounts and contracts in his/her name
  • All assets and profits accrue to the owner
  • No limited liability so creditors may attach the personal estate to cover business expenses
  • Difficult to attract investment
  • Unlikely to attract large business contracts because it is seen as being too small
  • No continuity…when the owner dies so does the business
  • Difficult to grow or to sell the business because it is not a separate entity.

Partnership:

 

Minimum 2 and maximum 20 people

  • Cheap and easy to set up as it does not have to be legally registered
  • No separate juristic personality separate from the partners.
  • Tax benefits – not taxed as a company
  • Partners own and control the assets and share profits according to the agreement
  • Partners share responsibility for decision making and the profitability of the business
  • Easier to raise capital because it is seen as a better risk than a sole proprietor and new partners can be invited into the business, bringing more capital
  • Anyone partner can bind the partnership
  • Partners are jointly and severally liable for debts
  • If the partnership is declared insolvent, then each partner is also sequestrated unless they guarantee to pay the debt
  • The partnership dies with the death of a partner unless the contract specifies otherwise
  • No statutory audit requirements
  • Decision-making may be cumbersome and potential for internal strife

Private Company (Pty) Ltd

 

 

 

Minimum 1 shareholder

  • MOI and Shareholders agreement regulate rights and responsibilities
  • Separate legal persona and limited liability
  • Transfer of ownership easy because of separation of identity
  • Adaptable to small and large businesses
  • Financial statements do not need to be audited
  • Shares may not be opened to public ownership
  • Must prepare annual financial statements
  • Unlimited number of shareholders and lifespan is perpetual irrespective of the life of the shareholders
  • Information is private and only available to the shareholders
  • Difficult and expensive to set up /wind up because of legal requirements
  • Subject to double taxation

Key take out: Consider carefully the business entity that will best suit the nature of your business, your vision and your pocket, and seek legal assistance.

 

Author: Janet Askew

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