So, you’ve got a brilliant business idea that’s ready to take the world by storm – the excitement is palpable, the possibilities endless and the journey exhilarating – but before you dive headfirst into the entrepreneurial abyss, there’s one crucial question you need to answer: How should you structure your new business, i.e. which corporate entity should you choose?
Caitlin Moses, candidate attorney at specialist, commercial law firm, Gillan & Veldhuizen Inc., advises, “Selecting the right corporate entity for your new business is a pivotal decision that can impact its success and sustainability. It’s not just about chasing your dreams; it’s about building a solid foundation to make those dreams a reality.”
Most business enterprises in South Africa have to be registered with the Corporations and Intellectual Properties Commission (CIPC) and are subject to the Companies Act of 2008 – but what does that actually mean for a new business owner?
Moses outlines below, the various corporate entities that might be a good fit for a new venture:
Sole Proprietorship:
Are you a one-person show looking to keep things simple? A sole proprietorship might be your best bet. It’s the most straightforward way to run a business, with you as the sole owner (although you may employ staff) and is the most basic and typical type of business that operates for profit which equates to your personal income. Because there is no limited liability in this form of corporate structure, the owner’s personal assets are included in this responsibility. “Do keep in mind that your personal assets are at risk if the business runs into financial trouble,” cautions Moses.
Partnerships:
Teaming up with a like-minded partner or partners (up to 20), a partnership allows you to share responsibilities and profits, and as it does not need to be registered with the CIPC, it is an inexpensive option to choose. Each partner provides capital, goods and/or services, and in exchange the earnings are split amongst the partners. “But remember, partnerships require solid partnership agreements that clearly define roles, responsibilities and profit-sharing to prevent potential disputes down the road,” emphasises Moses. Again, there is no limited liability.
Private Company (Pty) Ltd:
If you’re aiming for a more formal structure with limited liability, consider registering your business as a private company (Pty) Ltd. This entity provides protection for your personal assets, but it comes with compliance requirements, including the preparation of formal annual financial statements. A private company may not sell its shares to the broader public, yet it trades for profit much like a public firm does. It can be established by one or more persons, and must have a minimum of one shareholder and one director.
Personal Liability Company (Inc):
For professionals like doctors, lawyers or accountants, a personal liability company (Inc) can be an attractive option. It provides limited liability, some aspects but not all, while allowing professionals to practice their trade and requires at least one shareholder and one director. The present and former directors of this type of business are jointly accountable for the firms’ obligations, a legal structure frequently utilised by professional groups wanting to avail themselves of certain tax benefits.
Public Company:
Going big? As your business grows and meets specific criteria, you might consider transitioning to a public company. This entity can issue shares to the public and raise capital more easily, but it also comes with more extensive regulatory obligations. “You must establish a public company if you wish to be listed on the stock exchange. There is no cap on the number of shareholders it may have and it can be incorporated by one or more persons, with at least three directors and one member,” explains Moses. “A public company must also have an AGM, a company secretary, and be audited, and is also subject to CIPC and JSE regulations,” she adds.
“Don’t rush into this decision,” cautions Moses. “Each corporate entity has its advantages and disadvantages, and the right choice depends on your business goals, risk tolerance and long-term vision.” She adds that before making any decisions it would be wise to consult with a legal professional who can guide you through the intricacies of South African corporate law and help you to make an informed choice that aligns with your business aspirations, along with drawing up solid agreements that protect all the parties involved.
“As you embark on your entrepreneurial journey, remember that selecting the right corporate entity is not just a legal formality; it’s a strategic move that can successfully shape the future of your enterprise,” concludes Moses.
