The types of business structures.
The new companies act which became effective in South Africa during 2011 has slightly changed the various business structures available to South Africans: sole proprietor, close corporation, private company, public company, partnership, business trust, non-profit organisations, and a few others. We are only going to deal with the first three as they are by far the most common (and useful) structures in which to create a business.
1. Sole Proprietor.
Also known as a sole trader. It is simply that you start trading as yourself. For example, you could fix peoples cars for which they pay you. You are running a business, but there is no need to create a company name or structure. This is the simplest form of business and requires virtually no effort to set up and get going. You do need to inform the tax man of your extra income, although this will often be offset by business expenses. The biggest risk for this structure is that if the business fails, your creditors can take all your assets: your house, your car, your furniture – everything to recover the money you owe them, because you are the business. You cannot have partners as a sole proprietor, only employees.
So in summary this structure means you are the business and no new entity is created. The new Act allows you to trade in your personal name, but if you start the business now and want to have a trading name like “A plus plumbers” or “ABC Consulting”, then this name will have to be registered with the CIPC at www.cipc.co.za.
2. Close Corporation.
Also known as a cc. This form of business has been discontinued and is no longer an option if you are only starting now. CC’s that existed before 2011 can continue to exist, but nor more are being registered.
3. Private Company.
Also known as a Pty Ltd. This is now the most likely structure for entrepreneurs who want to have the advantages of running their business as a company. Essentially a new entity (think of it as an imaginary ‘person’) is created and names, called a company.
This entity is separate from you personally. It will have the owners (shareholders) which may be one or more persons who own the company and the managers (directors) who run the company. Sometimes these are the same people, but not necessarily.
These companies are registered with www.cipc.co.za and each year an annual return must be submitted to them to ensure you are still trading. Smaller companies will require an annual accounting review to be done by an accountant, which is a much simpler and cheaper version of an audit.
The advantage of trading as a company is that it gives you a more professional image and being reviewed by an accountant can help ensure that you are running things properly and following the law – particularly when it comes to certain taxes. You are also able to have other companies or similar legal structures that are share holders of your company. It allows several people to get together and share in the ownership of a business and makes it easier to sell portions or all of it to future buyers. There is also the element that the debts of a company generally belong to the said company. So if things go wrong and you haven’t traded recklessly, you only lose your investment and not your private assets too.
Whatever your structure you need to be aware that the Government will still require you to register for income tax, VAT, UIF, COID, PAYE and to apply for certain licenses depending on your industry, your size and whether you are employing staff.