Business structures - Which one is right for you?

When deciding on what business structure would be right for you, there is no one-size-fits-all approach and many factors need to be taken into account. This video looks at the basic differences between each organisational form.

Each type has its pros and cons and needs to be carefully considered. It's not only important from a general taxation point of view but also essential from a risk point of view. Below is a breakdown of the various organisation forms in South Africa with the key differences and considerations for each.

A sole-proprietorship is operated and owned by a natural person. It therefore has no legal persona but is one of the simplest forms of business to establish. It can trade under the name of the owner or it could trade under a fictitious name, bearing in mind that if it trades under a fictitious name, it still doesn't create a separate juristic entity. Therefore all of the risk and benefit in a sole proprietorship attaches to the actual natural person who owns the business.

This also leads to one of the major drawbacks of a sole proprietorship in that all of the assets of the natural person is attachable for the debt of the business, irrespective of whether they are utilised in the business or not.

A partnership is established when two or more persons come together to operate a business, trade or profession. It is usually established by concluding a partnership agreement.

A partnership also does not have a legal persona, therefore each partner is called upon to contribute either money, skills, labour or knowledge to the partnership. Each partner therefore also has an entitlement to share in either the profit or the losses of the partnership.

Here's where one of the major drawbacks of a partnership comes into play. Each partner can be held liable for all of the partnership’s debts or liabilities. Therefore you have joint and several liability as partners. A partnership also has a problem in terms of the continuity of the structure as every time a partner joins or a partner exits, the partnership technically dissolves.

Close Corporations sometimes also referred to as CC's. Since the inception of the Companies Act 71 of 2008, new CC's cannot be established but CC's already in existence can continue to trade as a CC.

As opposed to a sole proprietorship and a partnership, a CC does establish a separate legal persona. The owners of the CC would be the members of the CC. They own what's called a membership interest in the CC and that is expressed as a percentage. The major benefit of a CC is that the members of a CC have limited liability. Therefore they generally won't be called upon to make good for the debts of the CC. Continuity is also not a problem as the legal persona exists separately from its members.

The Company is one of the most generally used formats of business. A company is treated by law as having a separate legal persona and therefore has rights and obligations of its own. The owners of a company would be the shareholders of that company. The company would then be managed and directed by its Board of Directors. Shareholders of a company would have limited liability and therefore shareholders would not generally be called upon to make good for the debts of the company.

In terms of the Companies Act however, Directors can be held personally liable if they have been found to have breached their fiduciary duties towards the company. Companies also have to be registered by the Companies and Intellectual Property Commission (CIPC) and therefore the compliance burden on companies is slightly more cumbersome than would be on other formats.

Non-profit structures would usually take the form of either a non-profit organisation (NPO) or a non-profit company (NPC). These entities are usually established without an objective of making profit. Therefore they're established with some form of goal or mission statement, usually some form of public benefit activity or social or cultural activity.

In the event of a non-profit company, such a company wouldn't have shares of shareholders. It would only have members. Non-profit companies or non-profit organisations then generally also have a number of registrations that they can attend to in order to assist them in achieving their goals or objectives. This ranges from NPO organisation registrations or certain taxation registrations.

When deciding on what organisational form would be best for you, it's not an easy task. There's no one-size-fits-all approach that would work for every business. Therefore you have to take things into account such as your personal circumstances, your risk appetite, your size or the nature of your activities. There are a number of things to think about. We’d suggest that you should consult a competent professional in order to discuss the various facets in detail before deciding on a particular form.