When setting up a business, it is important to have a long-term view of how you plan to grow your business, as this will, to a large extent, determine the type of entity best suited for host your business. In this article, we take a closer look at sole proprietorship, partnerships, and private corporations, and how to determine which structure is most appropriate for your needs.

Legal personality

From the outset, it is important to understand the nature of the different legal entities, as this may affect your personal liability in the future. A sole proprietorship is a business operated by a single individual. There is no separation between the owner and the business and as such, no separate legal entity is formed. Similarly, in the case of a partnership – or an unincorporated joint venture – no separate legal entity is created.

On the other hand, when setting up a private company, a completely separate legal entity is created which is separate from the person of the owner or owners. The nature of the business you intend to operate will be an important factor in choosing the best vehicle for your business. For example, if you intend to start a home-based industry with relatively low turnover or work as a sole service provider, such as a nail technician or dietitian, then a sole proprietorship would be best. adapted to your needs.

Registration

A sole proprietorship is the easiest form of business to set up as there are no registration requirements, no fees involved, and you are free to name your business without having to reserve a name via the CPIC. As an individual entrepreneur, you are free to operate under your own name or under a trade name. Setting up a partnership, on the other hand, requires entering into a partnership agreement and while a verbal agreement is sufficient to form a partnership, it is always advisable to reduce the agreement to writing.

As with a sole proprietorship, the general partnership does not need to be registered with CPIC, no name needs to be reserved and there is no registration fee. . The requirements for setting up and registering a private company are the most onerous as the entity must be registered with the Companies and Intellectual Property Commission (CIPC) and must comply with the Companies Act 71 of 2008 Naturally, there are costs involved in setting up a private company and the name must be reserved and approved by CIPC.

Contract requirements

In the case of a sole proprietorship, the owner and the business are one and the same, which means that no contract is required. As mentioned above, although a partnership agreement can be verbal or implied, it is advisable to have a written agreement.

When registering a private company in South Africa, keep in mind that there must be a director and a founder who can be the same person. You will need to establish a Memorandum of Incorporation (MOI) which sets out the agreements relating to the management of the business. As the company founder, you can choose to use a standard MOI or customize an MOI for your specific needs.

If there are two or more shareholders, it may be beneficial to have a shareholders’ agreement in place to structure the relationship between the shareholders. When registering your company, you will need to submit your MOI along with your notice of incorporation, which must include details of the founders, number of directors and share capital.

Personal responsibility

In the case of a sole proprietorship and a partnership, keep in mind that sole traders and partners are personally liable for the debt of the business, which means that if the sole proprietorship or partnership becomes insolvent, creditors can attack the personal assets of the individual entrepreneur or partner. .

An important benefit of registering a private company is that the assets and liabilities of the company are segregated from those of the owners and as such the owners enjoy protection against the insolvency of the company provided that they have not signed a personal surety for the debts of doing business or engaging in reckless trading.

Number of owners

As the name suggests, a sole proprietorship can only have one owner. On the other hand, a partnership can be formed between 2 people up to a maximum of 20 people. If you’re starting out as a sole proprietor, it’s easy to turn your entity into a partnership by entering into a partnership agreement if you want to bring additional people into the business, although it can be difficult to separate what belongs to the company and what belongs to the individual during the transition. A private company structure requires only one owner and allows up to 50 non-employee shareholders.

Funding

While sole proprietorships and partnerships rely heavily on loans as a method of financing, private companies have the added advantage of being able to sell stock or issue new stock in order to raise capital if needed. There are also many opportunities for SMEs in South Africa to obtain financing and establish more flexible favorable tax structures for small businesses.

Quite often, entrepreneurs with a strong business plan will be able to raise venture capital to fund their start-up business and, if that is your intention, a private company would be a suitable structure.

Tax

As an individual entrepreneur, you will be required to report your business income when filing your personal annual tax return and you will be taxed according to the personal income tax schedules.

Similarly, in the case of a partnership, each partner must include all profits he personally earned when filing his respective personal tax return and will be taxed on the income according to the income tax tables. personal income.

A private company, being a separate legal entity, must register with SARS as a full taxpayer, with the company’s tax reference number listed on its notice of incorporation.

Once registered, a private company will be taxed at a flat rate of 27% for the tax year ending on or after March 31, 2023 (this rate was previously 28%, with tax on dividends deducted at 20%). A private company may be liable for other taxes, duties and levies such as VAT, PAYE, UIF, skills development levies and customs and excise duties, depending on the size, the nature and turnover of the business.

Administration

Naturally, registering and running a private company entails higher costs and as such, it is important to carry out a cost-benefit analysis to determine whether the benefits of running such an entity will outweigh the costs involved. The ongoing administrative requirements of a private company are set out in the Companies Act, including the filing of annual returns and the preparation of annual financial statements, if required.

Business Continuity

The lifespan of a sole proprietorship is limited to the lifetime of the sole proprietor, which means that the business ceases to exist in the event of the latter’s death. There would be no market value for the business other than its assets. In the case of a partnership, remember that the partnership contract gives rise to the joint venture, which means that if one of the partners dies, the partnership is dissolved and a new partnership contract will have to be concluded. As such, business continuity when it comes to partnerships can be quite cumbersome.

An important advantage of registering a private company is that the entity exists independently of the lifetime of its owners, and the business entity will continue to exist in the event of a shareholder’s death. Additionally, a private company can be sold – either in part (in the form of shares) or as a whole entity.