Guide to selecting the right business structure for your small business

The structure you choose will affect your taxes, personal liability, and ability to raise funds. Here’s an overview of the common structures available:

Sole Proprietorship

A sole proprietorship is the simplest form of business, owned and run by a single individual.

• Advantages: Simple setup and low-cost; full control; personal tax rates apply (no separate business tax).
• Disadvantages: Unlimited liability; personal assets are at risk; harder to raise capital.
• Best for: Small businesses or side hustles, such as freelancers or small retailers.

Partnership

A partnership involves two or more individuals agreeing to share profits, losses, and responsibilities.

• Advantages: Simple to establish; shared responsibility and resources; personal tax rates apply to individual partners.
• Disadvantages: Unlimited liability (unless it’s a limited partnership); potential for conflict; shared profits.
• Best for: Businesses with co-founders who bring complementary skills, like consulting firms or creative agencies.

Private Company (Pty) Ltd

A private company (Pty) Ltd is a separate legal entity from its owners, who are typically shareholders.

• Advantages: Limited liability for shareholders; easier to raise capital; professional image; lower corporate tax rate.
• Disadvantages: Higher setup and compliance costs; administrative complexity.
• Best for: Businesses planning to grow or seek outside investment, like tech startups or manufacturing firms.

Non-Profit Organisation (NPO)

An NPO is designed to serve the public interest rather than generate profits for shareholders, with specific compliance requirements.

• Advantages: Exemption from certain taxes; access to grants and donations; limited liability.
• Disadvantages: Cannot distribute profits; strict regulatory compliance.
• Best for: Organisations focused on social impact, like charities, foundations, or community services.

How to choose the right structure

1. Assess Your Goals: Are you looking to operate alone or with partners? Consider how much control and liability you’re willing to accept.
2. Evaluate Tax Implications: Consult with a tax advisor to understand how each structure affects your tax rate and responsibilities.
3. Consider Funding Needs: Companies are often better positioned to raise capital than sole proprietorships or partnerships.
4. Growth and Compliance: If you anticipate growth and want to limit liability, consider a Pty Ltd. Simpler businesses might benefit from remaining a sole proprietorship.

Business structures - at a glance

Criteria	Sole Proprietorship	Partnership	Private Company (Pty) Ltd	Non-Profit Organisation (NPO)
Liability	Unlimited liability	Shared liability	Limited liability	Limited liability
Tax Rate	Personal tax rate	Personal tax rate per partner	Corporate tax rate	Tax exemption for approved NPOs
Setup Costs	Low	Low	Moderate to high	Moderate to high
Funding Needs	Limited	Moderate	Easier access to capital	Grants and donations
Compliance	Minimal	Moderate	High	High
Best For	Solopreneurs, freelancers	Co-owned small businesses	Growing businesses, startups	Charities, social initiatives

Once you've selected the structure that aligns best with your business goals, consult with a legal or business advisor to ensure you comply with all relevant registration and regulatory requirements in South Africa. This approach will help you lay a solid foundation and set your business up for success!