Types of businesses

Contents

Sole proprietor, partnerships and companies are by far the most common business structures in South Africa, more information is provided one them below.

Sole Proprietor

Also known as a sole trader. It is simply where you start trading as yourself. For example, you could fix peoples cars for which they pay you. You are running a business, but there is no need to create a company name or structure. This is the simplest form of business and requires small effort to set up. You will need to notify the South African Revenue Service (SARS) of your resulting extra income, although this can also be offset by business expenses. The biggest risk for this structure is that if the business fails, your creditors can recover the debt from assets belonging directly to you.

So in summary this structure means you are the business and no new entity is created. You may trade in your personal name, but if you start the business and want to have a different trading name like "AJ Consulting", then this name will have to be registered with the Companies and Intellectual Property Commission (CIPC).

Partnerships

A partnership represents a number of people coming together, between 2 and 20 and contractually agreeing to operate a business together. They further agree to split any profits as per their agreement and in proportion to their interests.

In establishing a partnership each partner needs to make a contribution to it and as per a sole proprietorship the partnership is not a separate legal entity, leaving partners generally liable for debts. (i.e. jointly and severally).

Companies

Also known as a Pty Ltd. This is the most popular structure for entrepreneurs in South Africa. Essentially a company represents a new legal entity which is created and separate liability from the individual owner. It will have the owners (shareholders) which may be one or more persons who own the company and the managers (directors) who run the company, which may be the same people.

These companies are registered with the CIPC, and each year an annual return must be submitted to them to verify that the company is still trading. Smaller companies will require an annual accounting review undertaken by an accountant.

The advantage of trading as a company is that:

  • It gives you a more professional image.
  • Review by an accountant can help ensure that you are running things properly and following the law.
  • Ability to have other companies or similar legal structures that are shareholders of your company.
  • Allows several people to get together and share in the ownership of a business and makes it easier to sell portions or all of it to future buyers.
  • Debts of a company generally belong to the company, implying your personal assets are safe.

See previous article How to prepare a business plan

See next article Legal requirements to register a business

Disclaimer: This article has been prepared for information purposes only and does not constitute legal advice, or a legal opinion. The practical application of the provisions of this article will vary depending on the facts of each case. The publication, author of the article and companies or individuals providing commentary cannot be held liable in any way.

Source: Information kindly supplied by Red Tape Reduction, a Western Cape Government initiative

Back to top