Selecting a business structure

First of all, Happy New Year! I hope your 2012 is a prosperous one. If you are starting a business in 2012 or looking to register a formal business structure, then this blog article is for you. We will briefly look at a few of the business structures you can register in South Africa and the reasons you would choose each one.

Closed Corporations

Since the new Companies Act came into effect in 2011 we have said goodbye to the registration of new closed corporations ( see “No More CCs”) as well as conversions to cc’s. Individuals are now encouraged to register private companies.

Sole Proprietor

The sole proprietor or sole trader is the simplest business structure and requires no admin to setup. It is easy and costs little to run. As the name implies, you are the sole person on which the business is based and there can only be a single person in this business entity. Your only requirement is to disclose your income to the tax man. You are permitted to deduct certain expenses from your income and it is recommended you seek the services of a professional tax consultant to ensure this is done correctly.  The main disadvantage of this business structure is that all assets are tied into your own name which means that should the business go under, creditors are permitted to take your personal assets in order to settle the debt.

Partnership

Like the sole proprietor, a partnership is cheaper and easier to run than other more formal business structures. A partnership can be created between 2 and 20 partners and requires a written agreement to be drawn up, preferably by a lawyer. Be warned, the same disadvantages apply as in the sole trader and the risk increases as the number of partners increase. If one partner is taken to court for personal expenses, their creditor is permitted to repossess the partnership’s assets to settle the debt.

Private Companies ( Pty) Ltd.

With the ceasing of new closed corporation registrations, private companies are now the most common form of business structure to register, especially for entrepreneurs. This business entity permits several people to join together and share in the ownership of a business. This in turn makes it easier to sell portions of the business in the future.

One of the advantages of registering a private company is that your business and private assets / debts remain separate. Therefore creditors cannot look to your personal assets to settle outstanding monies.

A private company can be registered for a single person or more and requires a MOI (Memorandum of Incorporation) to be registered at the CIPC. A private company is made up of shareholders (owners) and directors (managers) who in some cases will occupy the same roles.

There are a few requirements and prohibitions for companies. One of the requirements is to either submit an annual return or for smaller companies, an accounting review will need to be carried out. Private companies are prohibited from offering securities to the public and there are also restrictions in place for the transferability of shares.

Registering a business

Should you require the registration of a formal business structure or advice on the best choice for your unique requirements, feel free to contact Brett on 021 421 4444.