Prospective Business Owners are confronted with various issues when establishing a new business. (Read more on “The Stillbirth of a New Business”)
The very first choice in your exciting and sometimes nerve-wracking journey to establish a new business would be to decide which Corporate Vehicle, or business type, you will use in bringing your business idea to fruition.
Each vehicle possesses a unique character and has its advantages and disadvantages. You should always seek professional advice from a skilled and experienced advisor before finalising this important decision as it is very difficult to change this vehicle at a later stage.
Choosing your Business Type
In this blog, we will provide a summary of each business type with the advantages and disadvantages usually associated with it. You should bear in mind that we do not intend to fully deal with these issues here.
Different business ownership structures
For a Sole Proprietor
- The business is conducted in the name of its owner and forms part of his/her estate. The owner will be liable for the debts of the business and his/her assets may be compromised when this business fails.
- The owner will be liable for the debts of the business and his/her assets may be compromised when this business fails.
- Conducting your business as a sole proprietor is highly discouraged.
- The business is conducted in its own name but forms part of the personal estates of all the partners.
- The partners will be liable for all debts of the business and their assets may be compromised when this business fails.
- The mismanagement of any partner’s personal finances may have a detrimental effect on both the partnership as well as the personal estate of the remaining partners.
- Use of this vehicle is discouraged.
The Business Trust
- The business, as well as the business assets, are held in trust and managed by the trustees of the trust.
- Business Trusts are generally not required to disclose their financial statements and their assets are protected against the creditors of both the beneficiaries and the trustees.
- Provides simplified taxing structures and reduced administrative costs.
- The powers of the governing body or trustees are however limited by the trust deed and the provisions of the Trust Property Control Act.
- Distributions of profit and the identity of the beneficiaries may be subject to the discretion of the trustees in cases of Discretionary trusts.
- The trust assets and operations are separate from the estates of the beneficiaries and trustees and they will not be held liable for any debts of the trust.
- The Business Trust may be very well suited for certain business types.
The Private Company
- Shares are allotted to the owners of the company and the day to day activities of the company are directed and controlled by the directors or board of directors.
- The companies assets and operations are separate from the estates of the shareholders and directors and they will not be held liable for any debts of the company.
- Distributions of profits are regulated by the company’s Memorandum of Incorporation, Shareholder Agreements and the approval of the board.
- The private company is the most commonly used enterprise vehicle.
- Private Companies may be subject to mandatory Corporate Governance
Consider the costs of different structures
In the past, the cost related to the audit requirements for different business types was a very important consideration. At that point, Close Corporations were a popular choice as a result of this cost. However, the introduction of the different audit requirements depending on a company’s Public Interest Score levelled the playing field.
This blog does not deal with Public Companies as it will be dealt with in a separate blog.