Different type of business structures

281

There are different ways in which you can setup your business , and it is important to understand what are the implications, benefits and risks of certain business structures.  This article is to give you a good overview of the different business structures that exist in South Africa.The purpose of this article is to outline the critical features and benefits of each business structure so that you can decide which structure best compliments your business.

Sole proprietor 

The sole proprietor , is perhaps the most common and default set-up for a business. There is only one owner where there is a sole proprietor and they make all the decisions and reap all the profits of the business. This type of business is not required to be registered with the Companies and Intellectual Property Commission (CIPC). Sole proprietors are shielded from the duties and obligations placed on registered businesses.It is also for this reason that they are not afforded the same protection. 

A sole proprietor is not seen as a separate legal entity. Therefore the owner incurs personal liability if the business becomes liquidated. In other words if the business becomes bankrupt, the debts of the business will be regarded as the debts of the owner and therefore the owners personal estate can be liquidated in order to pay off the debts of the business. This is what exposes the business to risk. In addition to this the business is limited in its ability to scale, as the success of the business is restricted  to the performance and the capability of the owner. No shareholders, or additional partners can be added or included  into a sole proprietorship. Furthermore the business does not have unlimited perpetuity, therefor when the owner dies so does the business.

Close Corporation

You can no longer register close corporations in South Africa in terms of the Close Corporation Act. The business that can be registered are embodied in the Companies Act. The option to register as a close corporation is no longer offered to business owners. A close corporation, often was a SME that had the same benefits and legal protection as a private company, but it was not burdened with the same formalities and duties of a private company.

Private Company 

A private company, is better known because it is the default company registration for many businesses. More often then not when people start a company, they register a private company.  A private company needs to be registered through CIPC, to learn more about this follow the link ().The benefit of a private company is that the business exists as a separate legal personality. With a private company, the owners have limited liability , and this means the debts of the company are not automatically considered the liabilities of the owners. There are only certain circumstances in which the owners incur liability for the financial obligations of the company. This is a great benefit of a private company. Another benefit of a private company is that is has unlimited perpetuity, this means that even if the original founders ,and owners die, the business continues. This makes private companies better suited to scale. They also have the opportunity to scale the business through selling ownership in the business for money.

The disadvantage of a private company, is there are formalities and legal duties placed on a private company that must be complied with.A failure to comply with these legal duties can result in costly fines. Even a company that generates zero revenue is expected to pay certain fees  in order to keep the business registered. Furthermore, once you have a registered company, you have to pay the necessary taxes that are incurred by the business, as in accordance with the regulations.

Public Company

A public company, is a company that is authorised to offer ownership in the company through shares to the company. There are a higher standards and duties that are imposed on public companies. These companies must satisfy the requirements of being a public company, or they can be subject to fines, imprisonments and lawsuits.. The benefit of a public company, is they can raise a lot of money through selling shares and stocks on the public market. This allows the company to scale, grow and expand.

A public company  just like in the case of a private company is regarded as a separate legal entity. Therefore the directors , and owners of the business are not personally liable for the liabilities of the business.

Partnership 

A partnership is viewed differently in South Africa , in comparison to other parts of the world. A partnership is created with a partnership agreement, but it is not regarded as a separate legal entity, but for tax purposes it is treated as one. With a partnership the partners are not awarded limited liability , and if the partnership collapses the partners can be held liable to pay of the debts. Also with partnerships there is joint liability, and therefore the behaviour of one partner can cause other partners to be liable. 

Partnerships are not ideal businesses to set up, as they are not regarded in South Africa as a legal entity, and therefore are not afforded the same rights as a private company. Partners are personally liable for the debts incurred by the business, and the partnership is not afforded perpetual liability.

Limited Liability Company 

This is a common form of entity for professionals who are by law required to have certain liability in their respective business.  Therefore law firms and accounting firms are often limited liability companies. A limited liability is more like a partnership , than a private company.The business has a perpetual existence and does not dissolve every time a partner leaves, however it does not have a separate legal personality. Therefore owners are liable for the actions of the business jointly and severally.

Limited liability companies can be registered through CIPC to learn more about this follow the link ().

Non-profit Organisations

A non-profit organisation , is an organisation similar to a business, except that it is not designed to make any profit. In terms of the Company’s Act an non-profit is not authorised to make any profits, it must carry out charitable objectives.This is clearly stated to prevent profit making companies disguising as non-profit organisation to get the tax benefits. Non-profit organisations are not subject to tax.This type of structure is required to register with CIPC. A non-profit organisation is a separate legal entity and the (directors) are not liable for any debts that are incurred by the organisation.

LEAVE A REPLY

Please enter your comment!
Please enter your name here