One of the first things with which budding entrepreneurs need to grapple is the different types of business entities in South Africa. Previously, the close corporation was the most common business entity for small and medium business enterprises (SMEs), but the introduction of the new Companies Act No. 71 of 2008 has, effectively, phased out close corporations.
So, what are the options for entrepreneurs looking to set up new businesses? Besides the personal liability company (Inc.), a legal business structure most suitable for firms of professionals, business owners can operate either as a sole proprietorship or as a private company, also known as a (Pty) Ltd.
Sole Proprietorships are the simplest business entities:
- There is one owner, who is entitled to all the profit
- Company registration is not required by the Companies and Intellectual Properties Commission (CIPC)
- Business name (the name under which you will be trading) must be registered with the CIPC, to meet the requirements of the Consumer Protection Act (CPA)
- A Memorandum of Incorporation (MOI) is not required.
- Sole proprietorships do not enjoy limited liability, i.e. there is no separation between the assets and liabilities of the business owner (the sole proprietor) and those of the business.
- Sole proprietorships are taxed in the sole proprietor’s name, according to Personal Income Tax Rates.
Private Companies are more sophisticated business entities than sole proprietorships, but are still suitable for start-ups:
- The number of owners can range from one person to fifty.
- A One-Man Company is a private company which has just one owner, and is also referred to as an owner-managed company. One-man companies are exempt from audit.
- Company registration with the CIPC is required
- Business name registration with the CIPC is required
- A Memorandum of Incorporation is required
- Annual returns must be filed with the CIPC to ensure that they’re in possession of the latest company information
- Unlike sole proprietorships, private companies are separate juristic persons and enjoy limited liability, i.e. there is a separation between the assets and liabilities of the company and those of its owner(s)
- Private companies are subject to Turnover Tax and Secondary Tax on Companies, and the owner(s) or owner-manager is/are subject to Personal Income Tax.