Practical tips for deciding how to structure your business

Deciding on the right type of structure for your business can be a difficult and frustrating process. Sometimes it feels as though you can’t get enough information, and there are other times when there just doesn’t seem to be a right answer.

Thanks to legislation, this is quite complex, so there are no easy answers. However, here I would like to offer a practical [and simplified] view of the main points that you should consider - hopefully, this will help with the decision making process and get you on the road to running your business rather than worrying about how to structure it.

See if this helps at all:

If you’ve found this useful or have any suggestions for improvement, please leave a comment below, it would be great to have feedback.

The above is a simplified view; other factors must be taken into account, but it should at least help you identify which ones would best suit you from a practical/business point of view.

Some brief notes on the different types of businesses:

Sole proprietor

• You trade in your own name.
• You are not protected from any losses the “business” incurs, so your own assets are at risk.
• You need to be personally registered for tax, VAT, etc.
• You need to be disciplined to account for everything correctly to understand whether you are making a profit or not.

Partnership

• Like a sole proprietor, no legal registration of the “business” necessary.
• Again, you are not separate from the business, so your own assets are at risk.
• The partnership can be registered for VAT, and you will account for your share of the partnership profits in your tax return.
• Partnership accounts are a must to be able to allocate the profits/losses appropriately.

Private company

• Must be registered and have a Certificate of Incorporation
• Can have 1 to 50 members.
• Trades as a separate entity and registered for tax, VAT, etc. in own name.
• Must have at least 1 director.
• While shareholders are separated from the business from a risk perspective, changes to legislation in recent years means that there are heavy responsibilities placed on directors. Know what you are getting yourself into. 
• Must be audited annually.

Public company

• Similar to a private company other than some specific requirements, including:
• Minimum of 7 shareholders, but no maximum [these are used for all JSE/AltX listed companies]
• Must have at least 2 directors.

I haven’t included a trading/business trust here as changes in legislation in recent years [primarily tax related] have permanently removed the primary benefits of using that type of entity.

Tax may also play a role in your decision. I haven’t included that here as it can get quite complicated, and I recommend speaking with a tax advisor regarding the tax requirements of the entity you decide on.

This is an important decision, so make sure you know where you want to go with it and choose wisely.