There is more than just one type of company in South Africa. Each type of company has its different functions and laws that it must comply with to function in South Africa. When you decide to start your business, you need to know the different companies you can start in South Africa.
A company is a legal entity formed by a group to engage in business. When you set up a business, it becomes a separate legal entity from you.
Before you go ahead with starting your business, you will need to know these types of companies. This will help you file for the correct registration and ensure your business aligns with the laws.
In this article, we explore the different types of companies and their functions.
Sole Proprietorship
A sole proprietorship is a business structure where one person owns and operates it. There is no distinction between the owner and the business. The benefits of a sole proprietorship are:
Advantages:
- Few legal and regulatory requirements.
- As the sole owner, you have complete control of the business and can make decisions quickly.
- Your business will be taxed as an individual. This will help you benefit from certain tax deductions and credits.
- The set-up of a sole proprietorship is much cheaper than other different types of companies.
Disadvantages:
- Total liability for everything will fall on you as the business owner.
- Raising funds is harder because it all falls on you as the owner. All credit checks and collateral assets must come from you.
Partnership
A partnership is a business structure that involves two or more people. The owners of the business share the profits and losses and own the business.
Advantages:
- Partners share the costs and risks that come with starting the business.
- By having partners, you can bring in different skills, knowledge and experience to the business. This will improve business performance and competitiveness.
- By having partners, the decision-making process is quicker. The different knowledge and skills make it easier to solve problems.
- By having partners, you can assign roles and responsibilities to each other. This will also increase efficiency and productivity.
- In South Africa, partnership income is taxed at an individual level. This can help you save on costs and take advantage of tax benefits.
Disadvantages:
- You and your partners are liable for the debts and obligations of the business.
- If you are in debt, you and your partners are individually responsible for the entire debt amount.
Note: If you get into a partnership, you must have a clear and legally binding partnership agreement. This agreement outlines the roles and responsibilities of each partner. Additionally, you must have a dispute resolution procedure.
Private Company (Pty Ltd)
This is a business structure that is privately owned and operated. There is limited liability for the company shareholders.
Advantages:
- Your shareholders are protected from liability. This means their personal assets are not attached to debts and liabilities.
- You can easily raise funds by issuing shares to investors.
- If you have a private company, the shareholders elect a board of directors to manage the business. This can help with separating ownership and management.
- By issuing shares and bonds to the public, you can easily grow your company and get financing quicker.
- Private companies are a separate legal entity. This means you can enter into contracts and buy assets using the company name.
Disadvantages:
- By starting a private company your business will be subject to more regulations and compliance requirements.
Public Company (Ltd)
This business is publicly owned and operated. It usually has an unlimited number of shareholders and various regulatory guidelines and requirements.
Advantages:
- By starting a public company, you can raise money quickly by issuing shares to the public.
- If you have a public company, you can offer your shareholders liquidity. This will allow your shareholders to buy and sell shares on the stock market.
- Starting a public company will give your business more exposure. This sort of visibility can be a good thing and can increase your business credibility with customers, suppliers and stakeholders.
- A public company is exposed to more laws and regulations. This helps increase your transparency and protects your shareholders’ interests.
- Your public company gives your shareholders many opportunities for profits. These profits are raised through stock appreciation and dividends.
Disadvantages:
- By starting a public company, you will have to comply with many laws and regulations.
- Your company will be under more pressure to perform because of the shareholders.
- You must make your financial and non-financial information public.
Non-Profit Company (NPC)
An NPC is a type of business structure that is developed for public benefit or any other non-profit purpose. This type of company is restricted from the distribution of profit
Advantages:
- If you start an NPC, you will be tax-exempt. This means you won’t have to pay income tax on the money you earn from your NPC activities.
- By becoming an NPC, you can apply for grants and funding from government and private organisations easily. You can do this by helping them achieve their objectives.
- Becoming an NPC means you can be at the forefront of achieving social impact. Additionally, you can address societal issues and still maintain your profits.
- Your NPC is its own separate legal entity. This means you can enter contracts and buy assets under the NPC name.
- Donations for your NPC are deductible for tax purposes. This includes donations from corporate and individual donors.
- Because NPCs are usually serving the public, you will gain a lot of credibility and visibility for your business.
Disadvantages:
- NPCs must follow a lot of regulations and laws. So, if you register an NPC, ensure you are aware of the regulations around it. E.g. Companies Act and the King Code of Governance.
- Your NPC must have a clear and legally binding Memorandum of Incorporation (MOI). This MOI must outline your NPC’s objectives, activities, and governance structure.
These five different companies are all great options for you. Pick the one that resonates best with your business vision and get your business off the ground today!
Remember, before you begin operating, you must register your business with the Companies and Intellectual Property Commission (CIPC).
For more information on how to start, manage and grow your business, visit the SME South Africa website. You can also book an appointment with one of our experts via our advice page.
