By Aleshia van der Ploeg, Director VDP Legal Consulting (Pty) Ltd
When you decide to start your own business, FIRST AND FOREMOST, you need to decide which legal entity you are going to use to house your business. Your business entity will depend very much on the nature and size of your business, and should suit your specific needs. Each legal entity in South Africa has different pro’s and con’s, and each entity is regulated by different laws.
There are 4 main entities which are used in South Africa:
SOLE PROPRIETORSHIP (1 owner)
Simply put, you trade as yourself ie: sole trader.
Legal liability: You are personally liable ie: if the business fails, you can lose all your assets.
Tax: the income of the business is disclosed on your personal tax return – it may result in possible higher taxation rates.
Costs & Admin: There are no real costs or formalities regarding setting up or running a sole prop – it is the simplest form of business. There are no registration and auditing requirements.
Flexibility & the future: It does not cater for business partners. There is no continuation of the business upon your death.
PARTNERSHIP (2-20 owners)
A partnership is a legal relationship arising from an agreement between 2-20 persons in terms of which each contributes towards a business with the object of making a profit. Profits are shared as per the agreed ratio. It is governed by the common law.
Legal liability: You and your partner are personally liable ie: if the business fails, you can lose all your assets. It does not have a juristic personality separate from the partners. Each partner can bind the Partnership. If the Partnership’s estate is sequestrated, the estates of the partners can follow unless the partners undertake to pay the debts of the Partnership.
Tax: All the partners will hand in a joint return for all the partners in respect of the business. Each partner must also hand in separate tax returns as well. A Partnership can register for VAT.
Costs & Admin: There are no formal requirements to set up or run a partnership, however a partnership agreement is recommended.
Flexibility & the future: The life of the Partnership is not separate from the lives of the partners- so if one partner dies, leaves or is declared personally insolvent, the Partnership becomes null and void.
There are no statuary audit requirements
CLOSE CORPORATION (1-10members)
A close corporation is known as CC and consists of ‘members’. It is regulated by the Close Corporations Act. CC’s may no longer be created in South Africa, and existing CC’s will continue to operate until they are converted into companies
PRIVATE COMPANY (1-50 owners)
It is also known as a Pty Ltd. It consists of 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. It is governed by the Companies Act No 71 of 2008
Legal liability: Companies are a separate legal entity and operate on the basis of limited liability. As a general rule, members are not liable for the debts of a company; however, there are exceptions to this rule. A company has its own rights and obligations, apart from those of its members (it is a juristic person). This means it has legal capacity to act and is competent to contract, to litigate, to appear in court, as a party to a legal action. This protects the members of the business.
Tax: a Company is taxed separately from its owner.
Costs and admin: A company must have at least one director and shareholder. It must be registered with CIPC and each year an annual return must be submitted to them to ensure you are still trading. A Memorandum of incorporation is required and a shareholders agreement is recommended. There are strict laws governing the duties and responsibilities of the company’s directors and officers. A company must hold an Annual General Meeting and issue annual audited financial statements.
Flexibility and future: Membership is restricted to 50 shareholders. A company is capable of succession ie: when the owner dies, the business continues and is capable of being passed-on to beneficiaries. It is easier to sell off portions of the business ie: shares are easily transferable.
This type of business structure in South Africa does not place any prohibition on foreign shareholding.
A company is the most recommended and likely structure for entrepreneurs as it provides optimal protection, flexibility and longevity.
For further information or assistance email aleshia@vdplegal.co.za
Aleshia van Der Ploeg LLB (RAU) was admitted as an Attorney of the High Court in South Africa in 2006. She is a member of the Law Society of the Northern provinces. She has 10 years post-qualification experience in corporate, commercial, labour and general law. She practised as an attorney and served as a Director before forming her own consulting firm.