Bizempire newsletter - Series 2 - Number 01
Subject: Small business structures in South Africa
In this message we explain some of the more common terms used in the South African small business world, namely: Company and Sole Proprietor.
A business needs to belong to someone, it cannot exist on its own. Someone needs to run it, own it and be responsible for it. Sometimes there is more than one person involved in one or more of these roles. To cater for these different scenarios there are several different types of structures that a business can take in South Africa. Here we are only going to deal with the two most common ones: The private company and the sole proprietor.
To start a business it is not necessary to create a company. If its small and you are the only owner, then you can run your business as a Sole Proprietor. This is simply a fancy way of saying that you personally, and only you, are the owner of the business.
- You do not have to go through the hassle and admin of registering a company. You simply start trading as yourself. So when you invoice your customers, your name appears at the top of the invoice.
- The cheapest way of starting a business. This is effectively the way that anyone is running a business if they do not register a company or some other special format entity. Street traders are a good example, however there are bigger businesses too, that are sole proprietors and not companies.
- No separate tax returns. All the business income and expenses are recoded in your annual personal tax return. It does make this task a bit more complicated, but not as much as if you did this for a company.
- There can be only one owner. If you intend to share the business with other owners, then you will need to set up a company.
- If the business runs into financial trouble, you are personally responsible for all the debts and promises - because you are the business.
- It is sometimes a little trickier to sell a business as a sole prop, mainly because its not always obvious what belongs to you privately and what belongs to the business.
Sometimes it makes more sense to run your business using a company. This is where you create a brand new entity, which will run the business. This entity is called a company. The owners of a company are called the shareholders. The people responsible for running the business at the top level are called the directors. Sometimes the shareholders and directors are the same people, but they can be different.
In South Africa a private company has (Pty) Ltd following its name. Sometimes you will come across one that says CC (close corporation), but this type of company cannot be created any more and only those already in existence can continue to use the structure.
- More than one person can own a company which allows you to partner with others to help start the business.
- More than one person can be given the responsibility of running a company.
- A company can be created with a name that reflects what the business does, and can be changed if required.
- Annual accounts show any prospective buyer exactly what is owned by the company, which makes selling the business simpler.
- Shareholders and directors can change and be added as the business grows.
- There is some protection from a financial failure, because most (but not all) the company debts belong to the company and not to the shareholders.
- Involves some costs and effort to register.
- Requires registering with CIPC and SARS as a minimum.
- Requires an accountant to verify your annual accounts, which adds to cost.
- More admin as there are several formalities that directors need to carry out each year.
Which option you choose will depend on you specific scenario and requirements. Good luck with your venture.
The content is set at a level that should be comfortable for those who are new to the business environment, but if something seems to be too complex or poorly explained, please let us know. Feedback, both good and bad is always welcome as we strive to give you more useful information.
We hope you find the format to be informal and informative.
The Bizempire Team
Helping you start and build your small business empire.