I remember thinking wryly to myself prior to signing my antenuptial agreement, that the law requires us to think of the divorce before we even say “I do!” There is some merit in this approach, however, because we are forced to think about the “what if’s?.” Similarly, starting a business is a long term, indeed potentially very expensive commitment. The choices you make when starting a business and choosing the type of ownership may have lasting consequences for you, your employees and the business itself. It is advisable to consider many scenarios as well as your vision for the business before choosing which entity will best suit your needs.
If your vision for the business is to grow large and/or potentially franchise or to have a chain store in every city, then a private or limited company will be required. Formal, registered companies are more attractive to investors and the directors enjoy a degree of protection from business debt by virtue of a limited liability. There is a heavy price to pay, however, both in the costs of the company set up as well as in annual legal and accounting fees. These structures are expensive, complicated and require a lot of administration. Unfortunately, Close Corporations may no longer be created, so smaller businesses do tend to register as private companies despite these disadvantages.
If the business is more service based (e.g. consulting) or it is projected to have a small annual turnover, then there may be little benefit to registering as a separate business (although there are taxation implications). A sole proprietorship is legally and financially inseparable from the owner, so it is simple to start or stop trading. On the other hand, it is essential to consider your eventual exit strategy before opting for a sole proprietorship or partnership. A private company or trust can be sold or passed on but a sole proprietorship or partnership ends with the death of an owner.
It is highly advisable to seek legal advice or to consult an accountant before leaping into a particular form of ownership which may prove costly or difficult to manage in the long run.
There are many things to consider when choosing the right business entity - the size and nature of the business, the cost and possible legal or tax implications and the ease of transferring ownership.
Think before you ink!
For more information, consult “The Essential Guide for Small-Business Owners” Nedbank, pp1-5