Choosing the right business format for your enterprise

Choosing the right format is an important part of setting up a business, especially since some forms of enterprise must be registered with the Registrar of Companies, and need to meet certain legal requirements. The kind of business format you choose will depend very much on the nature and size of your business, and should suit your specific needs.

Small and medium enterprises can take one of three forms: they can be either a sole proprietorship, a close corporation (a CC) or a private company (a (Pty) Ltd). Before deciding on which form your business should take, it's important to know the pros and cons, the requirements and obligations that come with each model.

Sole Proprietorship

This is the simplest kind of independent business, as a sole proprietorship doesn't need to be registered as a legal entity. You can only choose this option if you're a single owner, though, whether or not you employ or contract other people during the course of your work.

A sole proprietorship is often the ideal choice for a professional in private practice, a guest house owner, or the owner of a small craft business, for example, although it does have some disadvantages. For many, though, the advantages outweigh the disadvantages, as long as the business is carefully managed.

Advantages of a sole proprietorship:

•  it doesn't have to be legally registered
•  it's suitable for a single owner, whether or not he or she employs or contracts other people
•  it's a simple format to set up and manage

Disadvantages:

•  there's no distinction between the business's assets and the owner's assets
•  there's no distinction between debts incurred by the business and those incurred by the owner
•  the owner is fully responsible for all debts and liabilities incurred during the course of business

Close Corporation:

Another option for a small business is to trade as a close corporation (a CC). Close corporations need to be registered as legal entities, but provide owners with more legal protection than being a sole proprietor does.

This option is suitable for both single-owner enterprises, as well as businesses owned by up to ten partners, usually with a turnover of up to R1 million a year. The biggest advantage of a close corporation is that it separates the business's assets and liabilities from that of the owner or owners, providing them certain legal protections without imposing the requirements that have to be met by a private company. 

This, however, is one of the reasons that many clients and suppliers have come to distrust CCs, as the owners effectively have little legal obligation in the case of business failure. Managed well, however, CCs provide a good structural framework for smaller businesses.

Advantages of a Close Corporation:

•  it's a legal entity that separates the rights and liabilities of business and its owner/s
•  the legal requirements for registration are, however, less stringent that those for a private company
•  it's suitable for businesses owned by between one and ten owners
•  members have a pre-determined share in the business
•  it's under no legal obligation to produce audited financial statements
•  it's under no legal obligation to have an AGM
•  it enjoys perpetual succession
•  there are no prohibitions on a close corporation to avail itself of financial assistance in order to purchase a member's share
•  it benefits from a flat tax rate, which may be advantageous if the business has a high turnover. However, this may put the business at a disadvantage if the turnover is low

Legal requirements:

•  close corporations have to be registered at CIPRO
•  only individuals may be members, not companies
•  when registering a CC, the members have to provide a founding statement outlining the nature and purpose of the business
•  the business's name has to be reserved and registered

Private Company

A private company is usually the preferred choice for medium-sized enterprises with up to fifty shareholders. It has to be legally registered, and must have a Managing Director. Like a CC, it enjoys perpetual succession, and the shareholders are not personally liable for any debt that the company might incur during the course of doing business. It has the added advantage that both individuals and CCs may be members.

Unlike a CC, however, it has more well-defined legal obligations to meet, and is a more complex and expensive structure to set up and run.

Private Companies:

•  must be registered with CIPRO
•  have strict laws governing the duties and responsibilities of the company's directors and officers
•  must issue annual audited financial statements
•  must hold an Annual General Meeting
•  are under the obligation to avail themselves of financing to purchase members' shares when necessary
•  must have a Memorandum of Agreement defining the company's nature and purpose
•  must have registered Articles of Association
•  must reserve and register the company name
•  must have an registered physical address and a postal address

These three formats are very clearly applicable to three very different types of business, and the choice between them is usually straight-forward, being determined by the nature of the business and by its short- to medium-term business plan.