What Business Structures are Available for my Business?
Every business needs a legal business structure to exist, function, and grow. It determines your methods to raise capital for the business, the amount of taxes to be paid to tax agencies, and obligations towards your business. It will also decide on your business’ hierarchy within your employees. Before you register your business, you must understand the advantages and disadvantages of all the prominent business structures in South Africa.
There are mainly five business structures in South Africa: Sole Proprietorship, Partnership, Proprietary Limited Company, Public Company, and Franchise. There used to be a sixth one called Closed Corporation (CC), but it got discontinued on May 1, 2011, under the new Companies Act 71 of 2008.
In this article, we are going to simplify them as much as we can for your understanding.
1. Sole Proprietorship
In this business structure, the business has a single owner. They are the only one who is liable to pay taxes on profits earned from the business. It is an unincorporated type of business structure. This means you bear all the responsibilities and liabilities for your actions as a business owner.
The advantage here is that unincorporated businesses are easy to establish. It is a popular choice amongst small business owners as there is not much paperwork involved. The owner maintains complete control over the business. However, there is a catch – the business is not separate from the owner. It is an unincorporated business, and hence you are solely responsible for everything your business does. And if your business takes a bad turn and goes into debt, your personal assets may be in jeopardy.
Regardless, a sole proprietorship business still remains a popular choice due to its simplicity. It is a great structure for those who want to test out a business idea, start out small and see whether it can be successful. Of course, you will have to be ready to take the fall as well. Solo Proprietorships later transition into other legal structures as they grow.
2. Partnership
A partnership where two or more people come together to form a business entity. This is simply an upgraded version of Sole Proprietorship. Generally, a partnership is an unincorporated business but it can be made incorporated. This business structure is also very popular as now you have someone to watch your back, and so your partner(s) do too.
The main advantage of having a partnership is that you have more capital to work with. Partners have to pool in their money to grow the business together. Furthermore, all the financial burdens and expenses will be shared amongst the partners. Not having to run everything by yourself gives you room for a breather too!
On the downside, however, you cannot singlehandedly make business decisions. There are chances of arguments and possible fallouts with your partners. Regardless, it is a great way to start a business idea with trusted partners. You can transition this business into a Proprietary Limited Company, which will be an incorporated business.
Note
As mentioned in earlier points, you can definitely make your business incorporated as you grow. A business structure is not a once-off deal and you should consider changing your business structure as it grows and starts making millions. Know more about how you can do so with this article: Small Business Growth: Changing Your Business Structure (Source: Accion Opportunity Fund).
In South Africa, the Companies and Intellectual Property Commission (CIPC) manages such operations. Visit their website: CIPC :: Changing the Status of your Company
3. Proprietary Limited Company (Pty Ltd)
This legal structure is unique to Australia and South Africa. A Proprietary Limited Company is a separate legal entity. It has a small number of shareholders and one director. You can establish a Pty Ltd even as a sole proprietor of the business. Everything your business does is separated from your personal assets. So, in case your business gets in a pinch, your personal assets will still be safe from all the financial anomalies.
Pty Ltd is a private legal structure and one of the best business structures for small businesses in South Africa. You don’t have to explain your finances to anyone. Also, A Pty Ltd. company also have benefits on tax filings. However, the process of adopting this structure can be tedious. They have to comply with many legal rules and regulations. It is challenging to register a Pty Ltd business and it is also expensive. And as a private company, you cannot list your company on a public stock exchange or sell your shares publicly.
Get to know more about Pty Ltd: Private Company (Pty) Limited South Africa (intergate-immigration.com)
4. Public Company
When a private company decides to go public, it just means that they are offering their shares to the public by issuing new stock. This is called an Initial Public Offering (IPO) (Source: Investopedia). Such companies are listed on at least one Stock Exchange. Anyone who purchases stock of the company is called a ‘shareholder’. And since it’s public, anyone can be a shareholder.
Going public means you get to have more capital for your business through stock investments. If your company is doing good on the stock market, investors and traders are going to bring you more and more opportunities. Besides, the risk factor is spread across all your shareholders. So it does not put a heavy burden on a small group who actually ‘founded’ the business. Besides, IPO can also act as an exit strategy for the founders
However, it is challenging to get your company public. Besides, it can also affect your decision making for the company as the number of shareholders increase. As a public company, you are also obliged to release some of your company-related documents periodically for public inspection. This promotes transparency but it is not good for your trade secrets. Also, going public means you also enable people to buy your business. So, as a founder, if you cannot maintain a 51% majority in shares, you may lose your strategic position on the company’s board (Source: Investopedia).
Taking your company public needs a strategy. Make sure you think about a strategy before you do so.
5. Franchise
A franchise is a great way for businesses to spread their name and reputation without investing heavily into establishing their branches. Franchise businesses can be a good startup option if you want to run your business. You don’t have to ‘plan’ or ‘design’ a product or service and its costs. Everything is predetermined by the franchise and you just have to run it under their banner.
However, buying into a franchise can be expensive. Sometimes, even more, expensive than starting your own business. Your business will have to report the data to the main company and you technically cannot decide what direction your franchise can take. Besides, you will also have to pay royalties to franchises as you make a profit.
Although franchises have their own restrictions, you can use a franchise’s reputation to capitalise on for your business. Franchises also offer training programs for employees and support for the businesses, which will help you understand the direction they want to take or operate the business efficiently. Given all the strengths, a franchise possesses relatively less risk in starting a new business.
Here are the top ten reasons by the Entrepreneur that are said in the favour of owning a franchise.
Conclusion
These are the five main business structures in South Africa. Business structures are an important part of your business strategy. Hopefully, this article has given you a basic important idea on each business structure mentioned. You should choose carefully, as it is going to affect your business for a long time.
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