When registering your business, it is important to consider and evaluate the different business structures available to you. In South Africa the most common types of businesses are sole proprietorships, partnerships and private companies.
There are other types of business structures too, such as not for profit or non profit businesses as well as a holding company structure.
Selecting a legal entity for your business
Each business structure has different requirements and implications for taxation, liability and succession. Other than a sole proprietorship, all other business types need to be registered with the Companies and Intellectual Property Commision (CIPC).
When choosing a legal entity for your businesses it is important to have a good idea of your business, details of the partnership should you choose a partnership, the name of the business, whether it is for profit or not for profit and the tax implications.
Types of businesses in South Africa
- Sole proprietorship
- Partnership
- Private company
- Public company
- Non-profit
- Close corporation
- Personal liability company
- State-owned company
It is recommended to consult an expert such as an accountant or lawyer before making your final decision on what legal entity to choose.
Overview of the different types of legal entities for businesses
Here is a short overview of the most common types of legal entities in South Africa.
Sole proprietorship
A sole proprietorship can be described as an unincorporated business which is owned by one individual. A sole proprietorship has personal liability, thus the owner is responsible for all debts related to the business.
All income belongs to the sole proprietor, who will be taxed in their personal capacity. The business is not a distinct legal person, meaning that it has no legal personality. One advantage of a sole proprietorship is that the owner is independent.
Partnership
A partnership is where several individuals own, manage and operate a business together. A partnership is not a separate legal entity, meaning that each partner in the business is taxed in their personal capacity.
Partnerships are not protected by limited liability, and thus, each partner may be held personally liable for debts of the business.
Private Company
A private company can be incorporated by an individual or more than one person. A private company is treated as a separate entity from its shareholders, thus they have limited liability.
Private companies provide for perpetual succession, meaning that the company continues to exist even if the individual members change.
Non for profit / Non-profit Company
A non-profit or not for profit company is a company which is sole incorporated for public benefit or other object relating to one or several cultural or social activities, or a communal group or group interest.
The income and property of a non-profit company is not distributable to its incorporators, members, directors, offices or persons, and should be used to advance the purpose for which the non-profit was established.
A non-profit company must have a minimum of three incorporators and three directors.
Close Corporations and other Companies
Due to the New Companies Act No. 71 of 2008, no new close corporations (CC’s) will be registered, and no conversions of companies to close corporations are allowed.
Close corporations registered before the New Companies Act came into effect can continue trading as close corporations.
Close Corporations treated as private companies. Names of close corporations can still be changed by submitting a CoR 9.1 form to the CIPC. A close corporation is a separate legal entity and can be sued in its own right.
Personal liability companies’ names must end with the word “Incorporated” (Inc). The directors and past directors are personally liable, together with the company for any debts and liabilities of the company during their terms of office.
State-owned companies are companies that are either defined as “a state-owned enterprise” (SOE) in the Public Finance Management Act 1 of 1999 or it is a company owned by a municipality. Most of the provisions of public companies apply to state-owned companies as well.
Public companies are companies that may offer shares of the company to the public. Public companies, however, are restricted in their right to make pre-emptive share offers. Only public companies may be listed on the Johannesburg Securities Exchange (JSE). Public companies must have at least three directors.
Holding companies
South Africa, holding company can be registered with the CIPC as a public company or a private company with its own name and registration number.
Holding companies own a controlling / Majority share in one or more subsidiary companies. Subsidiary companies also need to be registered with the CIPC and require their own company names and registration numbers.
Should you choose to register your holding company as a private company, it is important to note that all subsidiaries will also need to be registered as private companies.
Liability considerations
The first factor one should consider is liability. This is the state of being legally responsible for something. For businesses, liability is usually money which is owed by a business for a purchase it made.
If a business acquires assets through loans, the business is increasing it’s liability, and depending on the company structure you choose, either you, or the businesses could be solely responsible for the liabilities.
Ultimately, the type of business structure you choose will have an impact on how much taxes you pay, the personal liability you face and the opportunities for you to raise money.
This choosing the best type of legal entity for your business is probably the most important decision you will make when starting a business.
