Choose the Right Type of Ownership for your SME [Updated]

Choose the right type of ownership for your SME
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[UPDATE – 29 June 2020]

Choose the right type of ownership for your SME

Before you do anything else, get your house in order – choosing the right business ownership is one of the first major decisions an entrepreneur will make. This decision should not be taken lightly.

Entrepreneurs should keep in mind the nature and future growth of the business, how to exit the business and the implications of the various types of entities – varying degrees of responsibilities such as reporting, compliance, tax positions or exposure to liability in personal capacity.

Choose the right legal structure and business ownership structure for your business and understand the implications – at the get go. Ensure that the legal structure fits the business growth strategy, growth potential, nature and complexity of your business model and planned exit. This will give you an early advantage to profit making and success. After all, you are an entrepreneur and you want to make millions.

Choosing the right business entity

The various business entities – partnership, joint venture, sole proprietor, trust, close corporation and company – are all uniquely different and have legal consequences that business owners are often unaware of.

Sole Proprietor/Trader – single owner, unincorporated (no registration formalities and compliance) and no distinction between the business and the owner.

Partnership – multiple owners, unincorporated (no registration formalities and compliance) and no distinction between the business and the owner.

The Sole Proprietor/Trader and Partnership do not exist as a separate entity therefore legal rights and obligations acquired through the course of the business vest in the partners collectively or the owner respectively.

Trust – a trustee or multiple trustees (no more than 20) sets up the trust to hold assets and or conduct business for the benefit of the trustees. The advantages include higher degree of protection to trustees and beneficiaries and possible lower costs.

Close Corporation (CC) – did you know that existing CCs will remain in place but no further registration of CCs may take place? It is also possible to now convert a CC to a Company.

What the law says

The Companies Act  71 of 2008 (the Companies Act) encourages small business owners to register companies. The Act is less prescriptive and simplifies certain obligations (such as financial reporting), if you are prepared to pitch a tent at the Companies and Intellectual Property Commission (CIPC) offices, CIPC is notorious for its back log and slow moving administration.

“Ensure that your business is completely separate, distinct and independent from yourself”

You versus the business

Close Corporations and Companies enjoy separate legal personalities and are separate to the members and shareholders. The business is conducted in the name of the CC or Company, and the assets and liabilities of the business are that of the corporation, and not that of the individual members.

Psst!…..here’s some great advice ensure that your business is completely separate, distinct and independent from yourself.

Here’s what an entity separate from its members is capable of:

  • Capable of having rights and obligations, apart from those of its members (it is a juristic person). This means it has legal capacity to act and is competent to contract, to litigate, to appear in court, as a party to a legal action. This protects the members of the business. If the business is taken to court, for example, it is the business’ assets that are at risk, not the personal assets of the owners.
  • Capable of succession, when the owner dies, the business continues and is capable of being passed-on to beneficiaries.
  • Able to be sold in totality or in portions to investors as a method of exiting the business.
  • Able to raise capital easier (private investors and banks) to fund expansion and growth.
  • Flexible, permits growth, easier to establish functional units or divisions or subsidiaries as the business grows or as the product /service offering evolves.
  • Taxed separately from the business owner, offering additional protection.

See also: What every business owner should know before signing a contract

Advantages and Disadvantages

There are advantages and disadvantages to everything in life, the same can be said for the different types of business ownership structures. According to a Entrepreneur Mag article, ‘5 Different Types of South African Business Structures here are some advantages and disadvantages of the different business structures. 

Sole proprietorship 

Advantages

  • A sole proprietorship is easier to set up than the other businesses.
  • As an owner, you have 100% ownership of the business.
  • As the owner, you get all the profits.

Disadvantages

  • As the owner you assume all the risk. 
  • If you want to include other owners in the business, you have to dissolve your business and form a new business.

Partnership 

Advantages

  • Access to more capital. 
  • Access to more knowledge and expertise.

Disadvantages

  • Responsible for all debts, even those incurred by partners.
  • Control of the business is shared among partners.

Close Corporations 

Advantages

  • Easy to establish and operate.
  • Easy transfer of ownership. 

Disadvantages

  • Number of members is restricted to 10.
  • A CC has more legal requirements than a sole proprietor or partnership. 

About the authorMonisha Prem (BA  MBA) is the CEO and senior legal practitioner at Excelsur Legal Services. Monisha is an admitted attorney with over 10 years post-article experience in law. 

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