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Choosing the right business format for your enterprise

Provided by Business Partners Ltd, South Africa's leading investor in SMEs

Before you jump right into starting your own business, there are many things to consider. One of these, is choosing the most appropriate legal entity under which to register your company. Below is a basic guide to the process.

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. Your business format will depend very much on the nature and size of your business, and should suit your specific needs.

This is one decision you should not make without the advice of legal experts in the field on small business ownership. Try to think as far ahead into the future of your business as is practical. Deciding on an inappropriate entity can have serious long-term consequences.

There are also tax implications for the type of business you register. It's good to know what these are, but it should not be your main motivation for choosing a certain kind of business. Also depending on the number owners, your options include a:

  • Sole Proprietorship (1 owner)
  • Partnership (2 to 20 owners)
  • Closed Corporation (1 to 10 owners)
  • Private Company (1 to 50 owners)
  • Business Trust (no limit to the number of owners)
  • Incorporated Professional Practice (which only applies for members of certain professions, like lawyers, doctors, accountants, etc.)
  • Combinations of legal entities

These formats clearly apply to very different types of business, and the choice between them is usually determined by the nature of the venture and by its short- to medium-term business plan.

Combination of legal entities

It is possible to structure your business in a way that provides the benefits of more than one legal entity. It's a very complicated process though, with alot of legal ramifications, so you'll have to get a legal expert to advise you.

Issues that will influence your choice of business format

Financing: Certain rules need to be followed when it comes to financing and these vary with each type of business. A sole proprietorship, for instance, may only raise finance from a loan, while a private company can sell shares in the company to a financier.

Administration costs: Sometimes the costs of running a certain types of business can cost you more money in admin fees than it's worth. On the one hand, a sole proprietorship will cost you nothing extra, while a Private Company comes with a heavy administration burden. 

Tax considerations: The tax implications for the various business entities differ greatly. Our "Taxes" category in the Accounting and Finance section details on what these are.

Business Continuity: What will happen to your business at your death; will it keep running, go to your family or have to be sold? The various legal entities have differing processes. For example, a partnership dissolves on the death of one of the partners.

What happens if you decide to sell? The format of you business will also impact on the condition under which you can sell your business. For example, in a partnership, you will only be able to sell the business assets and not the entity as such. 

Insolvency: This is obviously not a situation you plan for your business, but stuff happens and it's important to consider all the implications. If you do have to declare bankruptcy, what will happen to your personal assets? Can they be ceased to cover the debts of the business? You don't want to be in a position where you not only lose your business, but everything you own as well.

As you can see, there's a lot to think about before you get your business off the ground. Do your research and be sure to speak to some experts in this area.

Source: Sanlam Cobalt

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