Step 3: Choosing a business structure
The business structure under which you operate will affect: the safety of your personal assets; taxation treatment; wealth creation and ease of extraction; the continuation of the business upon ownership change; and, will determine what registration process you will need to take.
The most common forms of business structure are:
Sole trader: a type of set-up whereby your business has no separate legal existence from yourself as owner. You can use a business name or your own name and as the sole trader you are responsible for the liabilities of your business. Set-up costs are relatively inexpensive; therefore this is an ideal structure for starting with if anticipated profits for the first year are less than $80,000.
Partnership: involves starting a business with one or more partners whereby all partners legally share profits, risks and losses according to the partnership contract, which you establish at the onset of the business. The partnership agreement is vitally important so talk to us about what is in this contract before running off to your local solicitor.
Company (Pty Ltd): a proprietary limited company is the most common type of structure used by small business. Unlike partnerships and sole traders, it has more regulatory requirements and is a legal entity separate from its shareholders/owners.
Trading Trust: is an entity that holds property or income. When set up, the trust appoints a trustee (a person or company) to manage it. The trustee is responsible for distributing income, to the beneficiaries of the trust, which form part of a beneficiary’s personal income and are subject to income tax and provisional tax.
To determine which structure is best suited to your circumstance, start by answering the following questions:
- Is this a solo project or are others involved, or likely at some time to be involved is this business venture?
- What is the projected turnover?
- Will you have employees?
- Do you want full control of business?
- How would you like to manage your personal liability?
- Do you want to be taxed on the income from your business as part of your own personal income or as a separate legal entity that does its own tax return?
- Are you likely to seek additional investors for the business in the future?
- Is there a possibility you will want to sell the business in the future?