by Nicola Mullineux

Choosing the correct business vehicle is crucial to protect your and (potentially) your spouse’s financial wellbeing. Of particular importance when making this choice is understanding the concept of a separate legal personality.

Separate legal personality, which a company (for example) enjoys, means that the company is seen as a person independent of its directors and shareholders and, except in exceptional circumstances, the directors and shareholders of a company are not responsible for the company’s debts. The absence of separate legal personality, as is the case for a sole proprietorship, means that the person behind the business and the business itself are seen as one and the same person and as such, the person behind the business is responsible for the debts (including taxes) of the business. This can become particularly problematic where a sole proprietor is married in community of property because both spouses are personally responsible for business debts and vulnerable to creditors’ claims.

In the case of a sole proprietorship, the income of the business is also seen as the income of the person behind the business, as such the income of the business is taxed in the hands of the individual and could result in the individual falling within a higher income tax bracket which may be higher than that of a company.

For the reasons set out above, a sole proprietorship may not be the ideal vehicle for your business despite its relative ease of establishment and the limited amount of red tape involved in its management.

For more information on enterprise structures, separate legal personality, and how to choose the right structure for your business, please contact Eversheds Sutherland (KZN) Inc.

Nicola Mullineux is a Senior Associate (Corporate Commerical) at Eversheds-Sutherland (KZN) in South Africa. She graduated from Stellenbosch University in South Africa in 2012 and 2014 with a BComm (with law subjects) and postgraduate LLB respectively and was admitted as an attorney, conveyancer and notary public in 2017.