Are you an entrepreneur looking to open a company and are perhaps getting mixed information as to what vehicle will be best suited for you? Are you perhaps someone that wants to open another company or non-profit organization or pivot your business?
The aim of this article is to summarise the different options for types of companies or legal entities and to explain the different purposes of each entity.
Sole Proprietor
A Sole Proprietor does not require any legal registrations. It is not registered with Companies and Intellectual Property Commission (CIPC). A Sole Proprietor will always be directly linked to the owner under which it has been established. The owner (Sole Proprietor) will be held personally liable for all debts and damages suffered by the Sole Proprietorship.
You will be able to open a separate bank account and run it as if it is an independent company. You will however be taxed at standard personal income tax rates.
Best use:
This is best suited for personal service providers or people that work alone in their individual capacity, even though it is possible to employ others in a sole proprietorship. It is well suited for individuals that would prefer to keep their business small and less regulated.
Many people start off as a sole proprietor when they are still unsure of the business direction they want to go. It is, however, not advised to run a business as a sole proprietorship if your long-term goal is to grow the business. If you later want to sell shares, sell the business, obtain financing or investment, it would then probably need to be converted into a private limited (Pty Ltd) company. If you switch to such later, you will lose the business’ full financial history or records which in turn will be to your disadvantage when looking for investment. The new company will have no history of operation to give investor confidence.
Additional benefits:
When your turn-over is less than R1,000,000 per annum, you qualify to enjoy the tax benefits of a Micro Business.
Do you need advice on the best company vehicle for you? Click here to get in contact with a consultant.
Partnership
Partnerships are very similar to Sole Proprietorships, except that it contains more than one individual. It is set up by a partnership agreement that will set out all the terms of the partnership. All partners remain jointly and severably liable (either both or only one of the partners) for anything that happens in the business. Partnerships can only be established if the objective is to make profit.
The company is not a registered legal entity, and all partners will be taxed at the standard personal income tax rates for any profits or payments extracted from the business.
Best use:
As with a sole proprietorship, it is best used when the intent is to remain small or when you have no growth ambitions for the business.
When considering growth, it is better to start with a private limited (Pty Ltd) from the start (See previous section on Sole Proprietor).
Additional benefits:
When your turn-over is less than R1,000,000 per annum, you qualify to enjoy the tax benefits of a Micro Business.
Do you need advice on the best company vehicle for you? Click here to get in contact with a consultant.
Private Company – Proprietary Limited Company or Pty Ltd
Probably the most popular and used company type, a private company is a legal entity registered with the Companies and Intellectual Commission (CIPC). The founding document for a private limited company is a Memorandum of Incorporation (MOI) which sets the rules agreed by shareholders for the management of the company. The directorship and shareholding of the company is governed by the Companies Act.
It is possible to later turn a private company into a public company – “Going public”.
Best use:
For any business with growth ambitions or that would later be interested in financing, investment or selling of shares. Should you be interested with contracts at larger companies or public institutions, they will often require a private company registration certificate.
Additional benefits:
When your turn-over is less than R1 million per annum, you qualify to enjoy the tax benefits of a Micro Business.
When your turn-over is less than R20 million per annum, you can alternatively qualify to enjoy the tax benefits of a Small Business Corporation.
Do you need advice on the best company vehicle for you? Click here to get in contact with a consultant.
Micro Business
Micro Business is a categorization for any type of business for profit (Sole proprietors, partnerships, private companies), where additional benefits, such as tax benefits may apply.
Micro Businesses with an annual turn-over under R1 million qualifies for turn-over tax (as opposed to income tax), with a maximum annual tax of R14,150. See more on turn-over tax here.
Further advantages of Micro, Small and Medium (SME) is various government initiatives and financing support.
Best use:
When looking at the tax benefits, it depends on the type of legal entity and your growth ambitions if you will choose to register as a Micro Business. Another option to consider that may have greater benefits is a Small Business Corporation.
Do you need advice on the best company vehicle for you? Click here to get in contact with a consultant.
Small Business Corporation (SBC)
Small Business Corporations (SBC) is a categorization for private limited companies where your first R80,000 annual profit is non-taxable. From there the tax rate increases in brackets of 7%, 21% up to 28% for annual profits above R550,000 (Note that income tax for other private limited companies that does not qualify for SBC, is a fixed rate of 28%).
Qualifying criteria includes that your annual turn-over must be less than R20 million, shareholders must be natural persons with no shares in other private companies and you may not be a personal service provider.
Having at least three employees will help meet some of the qualifying criteria, although it is not a criterion on its own.
Do you need advice on the best company vehicle for you? Click here to get in contact with a consultant.
Franchise
A franchise is a grant or a business license issued by the franchisor to the franchisee, entitling the franchisee to the use of a complete business package containing all the elements necessary to establish a previously untrained person in the franchised business and enable him or her to run it on an ongoing basis, according to guidelines supplied, efficiently and profitably.
The type of company registration can still be Pty (Ltd) or other types.
Best use:
A franchise is best suited for an entrepreneur who needs support from an already established business (franchisor) in the set-up, marketing and running of a business.
Should you already have a business, product or service and want to expand to a wider audience, this would be a good vehicle to achieve this with. As the franchisor, you will receive fees from your franchisees, and in turn, you provide the business model, marketing and ongoing support to the franchisees.
The relationship between the franchisor and franchisee is governed by the Consumer Protection Act.
Additional benefits:
There are various franchise funding options with different criteria to qualify for the investment. For most of the funding vehicles, the Franchisee will have to be a registered private company to qualify. See more on a Private Company above.
Do you need advice on the best company vehicle for you? Click here to get in contact with a consultant.
Public Company
Public companies are very similar to private companies, except that it offers shares to the public on a listed stock exchange (such as the Johannesburg Stock Exchange). There are very strict compliance requirements to list a public company and administration and secretarial operations are extensive.
A private company can later be turned into a public company.
Do you need advice on the best company vehicle for you? Click here to get in contact with a consultant.
Non-Profit Organisations
The purpose of Non-Profit organisations is to give a platform to a group of 3 or more persons who have the same objective and most importantly do not want to share in the profits of the organisation. Any and all profit must be put back into the organisation or be used for public benefit purposes.
For more information on Non-Profit Organizations, see here. Do you need advice on the best company vehicle for you? Click here to get in contact with a consultant.
