Business Entity Types
There are essentially four business entities in South Africa, namely Sole Proprietorships, Partnerships, Close Corporations and Companies.
SOLE PROPRIETORSHIP
(single person business}
A sole proprietorship is a business owned and operated by a single person. This Is the easiest, least costly.
and least regulated type of business to access. The proprietor has sole responsibility and control, but is personally liable for all claims, taxes and debts against the business, as well as for injuries caused by or to employees during their employment. This business entity may expose the individual to litigation and is normally only selected by smaller business types.
PARTNERSHIP
A partnership is an incorporated business owned and operated by two or more people,
but limited to 20 persons (natural or juristic persons) except for partnerships of certain recognised professionals, including accountants and attorneys, where up to 50 persons may be incorporated.
–A partnership may be formed by way of a verbal agreement between the parties. As with a sole
proprietorship partners are responsible for any debts of the partnership. No other statutory provisions govern partnerships. It is important to be aware that each partner may be held personally liable, just as in a proprietorship. In addition, partners are taxed in their personal capacity. There are no separate legal entities, and no registration formalities exist in relation to partnerships. Individuals may also carry on business as sole proprietors.
CLOSE CORPORATION
A close corporation may be formed by at least one, but not more than 10 members. The only persons qualified to become members are:
Natural persons, a trustee of a testamentary trust who is not a juristic person, trustee, administrator and executor or curator for a member who is insolvent, deceased, mentally disordered or otherwise incapable of managing his or her affairs.
The objective of the Close Corporation Act of 1984 is to provide for a simpler in expensive business entity for the single entrepreneur or a few participants.
The close corporation is governed by the Close Corporation Act. The close corporation has a legal identity distinct from its members. Each member stands in a relationship of faith/trust to the corporation and may become liable to the corporation for losses suffered as a result of a breach of faith. However, unless the members have signed deeds of surety, they cannot be sued in their personal capacities for the cc’s debts and would thus not be liable for such debts. When borrowing money, however, most financial institutions would require the members to sign surety for the debt. The members may enter into a membership agreement to govern relationships between them.
ADVANTAGES OF A CLOSE CORPORATION
- Formation It is very easy to form.
- Liability The members have limited liability.
- Taxation Taxation is separate to that of the members.
- Legal Entity The close corporation retains a separate legal identity from members.
DISADVANTAGES OF A CLOSE CORPORATION
- Membership is limited to not more than 10 members.
- Financial institutions may require sureties from each member before granting a loan.
COMPANIES
All companies must register with the registrar of Companies and comply with the provisions of the Companies Act.
A company is treated as a separate and distinct unit from its shareholders. A company may enter into contracts and may sue or be sued in its own name. Legally it is treated as an artificial person having rights and duties of its own. This business entity is usually the costliest to form. Further, audited financial statements are required.
Advantages of a company
- Liability Limited liability for shareholders.
- Continuity Transferring of shares and thereby ownership.
- Credibility Easier to raise capital.
- Possible to separate business functions into different companies.
DISADVANTAGES OF A COMPANY
- More expensive to launch and maintain.
- Legal formalities are sometimes cumbersome.
- Control and regulations.
- Possible liability of shareholders.
- Private companies may not offer shares to the public.
Companies have share capital and may be divided into two types, namely private and public companies.
PRIVATE COMPANY
A private company is one which, by its articles.
- restricts the right to transfer its shares,
- limits the number of its shareholders (other than employees of the company to 50; and
- prohibits any offer for the subscription of any shares or debentures to the public.
Private companies are recognised by the words “!Proprietary) Limited” or (Pty) Ltd.
PUBLIC COMPANY
A public company is not subject to the restrictions of a private company. The name of the public company ends with the words “Limited”. A public company may offer shares to the public. It must have at least seven shareholders unless wholly owned and at least two directors.
BUSINESS TRUST
Generally speaking, a trust is not a legal personality. It is represented by the trustee who embodies it and holds title. He/she deals with the property in which trust rights exist. Contracts with regard to the rights and property affected by trusts are the contracts of the trustee. He/she in person, is liable for them. He/she is not acting as an agent or
representative of another. He/she is acting for himself/ herself, but with Judiciary obligations to others. It differs from a corporation or partnership, in that the former is a legal person, whilst the latter is an association of individuals united for transaction of business.
Co-operative
A co-operative is a form of business that is voluntarily owned and controlled by its users. It is operated for them on a cost basis. Examples of cooperative businesses are: farm supply. financial purchasing, health, day care and housing.