Choosing a business type for new businesses

By Bèan du Plessis

Prospective business owners are confronted with various issues when establishing a new business. The very first choice in your exciting and sometimes nerve-wracking journey to establish a new business would be to decide which Corporate Vehicle, or business type, you will use in bringing your business idea to fruition.

Each vehicle possesses a unique character and has its advantages and disadvantages. You should always seek professional advice from a skilled and experienced advisor before finalising this important decision as it is very difficult to change this vehicle at a later stage.

Choosing your business type

In this article, we will provide a short summary of each business type with the advantages and disadvantages usually associated with it. (Note that this article does not deal with Public Companies).

- Advertisement -

Different business ownership structures:

For a Sole Proprietor

  • The business is conducted in the name of its owner and forms part of his/her estate. The owner will be liable for the debts of the business and his/her assets may be compromised when this business fails.
  • The owner will be liable for the debts of the business and his/her assets may be compromised when this business fails.
  • Conducting your business as a sole proprietor is not encouraged.

The Partnership

  • The business is conducted in its own name, but forms part of the personal estates of all the partners.
  • The partners will be liable for all debts of the business and their assets may be compromised when this business fails.
  • The mismanagement of any partner’s personal finances may have a detrimental effect on both the partnership as well as the personal estate of the remaining partners.
  • Use of this vehicle is discouraged.

The Business Trust

  • The business, as well as the business assets, are held in trust and managed by the trustees of the trust.
  • Business Trusts are generally not required to disclose their financial statements and their assets are protected against the creditors of both the beneficiaries and the trustees.
  • Provides simplified taxing structures and reduced administrative costs.
  • The powers of the governing body or trustees are however limited by the trust deed and the provisions of the Trust Property Control Act.
  • Distributions of profit and the identity of the beneficiaries may be subject to the discretion of the trustees in cases of Discretionary trusts.
  • The trust assets and operations are separate from the estates of the beneficiaries and trustees and they will not be held liable for any debts of the trust.
  • The Business Trust may be very well suited for certain business types.

The Private Company

  • Shares are allotted to the owners of the company and the day-to-day activities of the company are directed and controlled by the directors or board of directors.
  • The companies assets and operations are separate from the estates of the shareholders and directors and they will not be held liable for any debts of the company.
  • Distributions of profits are regulated by the company’s Memorandum of Incorporation, Shareholder Agreements and the approval of the board.
  • The private company is the most commonly used enterprise vehicle.
  • Private Companies may be subject to mandatory Corporate Governance

Consider the costs of different structures

Bèan du Plessis
By Bèan du Plessis (B-Proc), founding partner of Baartman & Du Plessis Attorneys.

In the past, the cost related to the audit requirements for different business types was a very important consideration. At that point, Close Corporations were a popular choice as a result of this cost. However, the introduction of the different audit requirements depending on a company’s Public Interest Score levelled the playing field.

 

 

- Advertisement -

Prospective business owners are confronted with various issues when establishing a new business. The very first choice in your exciting and sometimes nerve-wracking journey to establish a new business would be to decide which Corporate Vehicle, or business type, you will use in bringing your business idea to fruition.

Each vehicle possesses a unique character and has its advantages and disadvantages. You should always seek professional advice from a skilled and experienced advisor before finalising this important decision as it is very difficult to change this vehicle at a later stage.

Choosing your business type

In this article, we will provide a short summary of each business type with the advantages and disadvantages usually associated with it. (Note that this article does not deal with Public Companies).

- Advertisement -

Different business ownership structures:

For a Sole Proprietor

  • The business is conducted in the name of its owner and forms part of his/her estate. The owner will be liable for the debts of the business and his/her assets may be compromised when this business fails.
  • The owner will be liable for the debts of the business and his/her assets may be compromised when this business fails.
  • Conducting your business as a sole proprietor is not encouraged.

The Partnership

  • The business is conducted in its own name, but forms part of the personal estates of all the partners.
  • The partners will be liable for all debts of the business and their assets may be compromised when this business fails.
  • The mismanagement of any partner’s personal finances may have a detrimental effect on both the partnership as well as the personal estate of the remaining partners.
  • Use of this vehicle is discouraged.

The Business Trust

  • The business, as well as the business assets, are held in trust and managed by the trustees of the trust.
  • Business Trusts are generally not required to disclose their financial statements and their assets are protected against the creditors of both the beneficiaries and the trustees.
  • Provides simplified taxing structures and reduced administrative costs.
  • The powers of the governing body or trustees are however limited by the trust deed and the provisions of the Trust Property Control Act.
  • Distributions of profit and the identity of the beneficiaries may be subject to the discretion of the trustees in cases of Discretionary trusts.
  • The trust assets and operations are separate from the estates of the beneficiaries and trustees and they will not be held liable for any debts of the trust.
  • The Business Trust may be very well suited for certain business types.

The Private Company

  • Shares are allotted to the owners of the company and the day-to-day activities of the company are directed and controlled by the directors or board of directors.
  • The companies assets and operations are separate from the estates of the shareholders and directors and they will not be held liable for any debts of the company.
  • Distributions of profits are regulated by the company’s Memorandum of Incorporation, Shareholder Agreements and the approval of the board.
  • The private company is the most commonly used enterprise vehicle.
  • Private Companies may be subject to mandatory Corporate Governance

Consider the costs of different structures

Bèan du Plessis
By Bèan du Plessis (B-Proc), founding partner of Baartman & Du Plessis Attorneys.

In the past, the cost related to the audit requirements for different business types was a very important consideration. At that point, Close Corporations were a popular choice as a result of this cost. However, the introduction of the different audit requirements depending on a company’s Public Interest Score levelled the playing field.

 

 

- Advertisement -

Must Read

Latest Articles