You have the idea, you have the passion and the know-how, you may already be up and running but do you know the appropriate kind of business structure to suit your business and your pocket? Choosing the right format of business ownership has to be informed by your future goals, as much as by the current width of your wallet.
What is your vision for the business in the medium to long term? A family-run restaurant is one thing, a growing franchise food outlet is quite another. What is your exit strategy? Yes, unless you want to die at the till, when and how would you like to hand over the baton and put your hard earned cash into a retirement villa in Plett?
There are many considerations when deciding on the right type of business entity, depending on the nature, size, and potential of the business. There are also cost, tax, financing, the difficulty of administration and legal considerations, even implications for your family and the business in the event of your death or insolvency. It is advisable to seek legal advice or to consult an accountant before leaping into a particular form of ownership which may prove costly in the long run.
The common for-profit business entities that will apply to most small businesses are:
- Sole Proprietors: the business and the owners are one and the same. There is no separate legal identity. This is the cheapest and easiest way to begin and end business as it does not need to be registered. The person operates and contracts in his/her personal capacity and is liable for all debts incurred by the business.
- Partnership: is an association for gain between 2 or 20 partners. Each partner must contribute to the business according to the agreement. There is no separate legal identity from the partners. A private company: is an association of 1 or more persons for profit and it is regulated by the Company Act 71 of 2008. It must have a Memorandum of Incorporation, a Shareholders agreement and “Proprietary Limited (Pty Ltd)” is added to the name. It is a separate, juristic person capable of contracting in its own name.
Advantages and disadvantages at a glance:
|Entity||Business Ownership / Structure||Advantages||Disadvantages|
|Sole Proprietor||1 natural person||
|Partnership:||Minimum 2 and maximum 20 people||
|Private Company (Pty) Ltd||Minimum 1 shareholder||
Key take out: Consider carefully the business entity that will best suit the nature of your business, your vision and your pocket, and seek legal assistance.