An important question every entrepreneur has to ask, but one that is possibly not always top of mind, is: what type of business is best for me?
This question has been simplified to some extent since the option to register a Close Corporation is no longer available. The CC was the option of choice before the new Companies Act came into force in 2011 because this structure had lower requirements than for a Pty Ltd.
The question of business type or structure is important because each has specific legal requirements and protection that are important to bear in mind.
No-one expects their business to fail, but should this happen the extent of the damage to personal pocket and reputation could be limited if the correct structure is selected from the get-go.
The most common business type that an entrepreneur is likely to select is that of a Private Company - which carries the (Pty) Ltd designation. This means the entity is considered a legal ‘person’ to which all contracts and profits are attributed, and from which all debts and losses will be claimed. This provides the best protection for shareholders and directors against personal liability - as long as they are not guilty of trading recklessly or using this structure to conduct illegal activities.
There is, of course, the option to trade as a sole proprietor, but this offers no separation of liability between the entrepreneur and his/her business activities. At first sight, this may seem like the easiest way to start trading as a small business, but one has to question whether the personal risk is worth this ‘convenience’. Funders, such a bank or potential investor, are also less likely to put their faith in a business that operates as a sole proprietorship than a properly registered Pty (Ltd).
Another common form of business - more likely formed by a group of entrepreneurs - is the Co-operative. These tend to be the structure of choice for community projects or collectives of individuals working toward a common goal. A co-operative still pursues the objective of producing a profit, although it is seen more as a structure for individuals to work toward the common good of all involved rather than outright global domination.
Key take-away: A business structure provides legal protections, but also imposes legal compliance on the company owners. Choose the structure that offers the best protection and benefits in the long term.