Table of Contents
1. Sole Proprietorship
The easiest way to start your business (if you are on your own) is a Sole Proprietor. Just market your service or product and start selling. You can operate under your name or some other fictitious name (trade name), as this helps with the marketing of your business. The Sole Proprietor is not a legal entity.
The Sole Proprietor uses his/her own money and assets and assumes the risks of the business dealings.
The Sole Proprietorship does not have to be registered at CIPC.
1.1 Costs
The Sole Proprietor does not need to register the business at CIPC and therefore does not cost anything at CIPC.
1.2 Employees
You can hire employees for your business, but you are required to register the permanent employees the Department of Labour for Unemployment Insurance Fund (UIF) and Compensation Fund.
1.3 Tax
The Sole Proprietor is taxed as an individual and the Sole Proprietorship is not registered as a company at SARS.
The employees are required to be registered at SARS and depending on the tax tables, then you will be required to pay over the Pay As You Earn (PAYE) taxes.
1.4 Advantages of a Sole Proprietorship
- No need to register at CIPC and therefore little to no legal requirements for setup.
- Quite easy to setup and operate.
- Quite easy to close or discontinue the business.
- The Owner makes all the profits.
- The Owner makes all the decisions, so decision making can be much faster.
1.5 Disadvantages of a Sole Proprietorship
- One owner that means the decisions taken may not be the best all the time.
- One owner that means that the skillset is limited. However, the skills can be complemented with people employed.
- The owner is responsible for all debt in the business.
- The ability to obtain more money (raise capital) is dependent on the owner’s personal ability to secure the money. This means that growing the business fast might be a problem.
2. Partnerships
Is when two or more people get together based on an agreement to start and operate a business for the purposes of generating an income or of course making profits. For example, a few lawyers can get together and form a partnership, thereby operating a business partnership. It is generally that like-minded people would get together and start a partnership. It is popular with Accountants, Lawyers, and Architects.
Each partner is regarded as an owner and can bring money, skills, assets into the partnership. They would then expect to share in the profits and losses of the partnership.
The partnership is not seen as a separate legal entity and therefore the partners are jointly liable for the debts. This means that if you owe money to your creditors, then all the partners are liable to pay them.
The Partnership does not have to be registered at CIPC
2.1 What typically goes into a Partnership Agreement?
- What is the objectives of the Partnership?
- What is the name of the Partnership?
- Who are the Partners? (Full Names, Identity Numbers, Addresses)
- What will each Partner contribute to the Partnership?
- How much time will each Partner contribute to the Partnership?
- How will the profits and losses be distributed to the Partners?
- Will there be a Bank Account? And who will be the signatories?
2.2 Types of Partnership
Ordinary or General Partnership: this type of Partnership is known to the public and the Partners are jointly responsible for the Profits and Losses. This means that they need to cover the debts personally.
Extraordinary or Anonymous (sleeping) Partnership: this type of Partnership is where a Partner, some Partners or all Partners are not known to the public. This means that they remain anonymous.
Commanditarian Partnership: “the partner is purely a financial participant with a restricted liability-similar to a shareholder in a company. He shares in the profits and losses, but their liability is restricted to their specific contribution or to an agreed amount”. (SARS, 2020) (Source: SARS Website)
2.3 Costs
The Partnership does not need to register the business at CIPC and therefore does not cost anything at CIPC.
2.4 Employees
The Partnership can hire employees but need to register permanent employees at the Department of Labour, Unemployment Insurance Fund (UIF) and Compensation Fund (CF).
2.5 Tax
Each partner is responsible for the taxes based on the share of profits. The Partnership itself is not a legal entity and is not registered at SARS as a company.
2.6 Advantages of a partnership
- Relatively quick to setup.
- No need to register at CIPC and provide any further compliance. It is therefore not a legal entity.
- No statutory audit requirements.
- Partners share their costs and risks.
- Each partner can bring varied and great skills. The combined skills make the Partnership stronger and can be more effective.
- Partners can bring in more sales, money, own assets apart from their skills.
- The decision making might take longer but at least the risks can be discussed and plans to mitigate it can also be discussed.
2.7 Disadvantages of a partnership
- All Partners are responsible for the debts in the Partnership. This means that they are all personally liable to pay their creditors (as per their share agreement).
- If a partner leaves or deceases, then the Partnership is dissolved. The Partnership has to be then re-established.
- The Partnership would mean more decision-making effort. There could be differences of opinion.
- If one Partner makes a poor decision, it may affect the other Partners quite hard. They may lose assets of the Partnership and/or even their personal assets.
3. Private Company
A Private Company – (proprietary limited or Pty LTD) is a separate legal entity. This means that it has a separate life from the Director(s) and has rights and duties of its own.
The company must be lawfully registered at CIPC and at SARS. The company will receive a Company Number and a company Tax Number.
To start a Private Company, only one person is required as a Director and one incorporator (which can be the same person). However, there may be more than one Director.
The Director(s) are the shareholders and the management employed may or may not have shares in the company.
3.1 Costs
It costs R125 to register the company at CIPC and R50 to reserve a name. Reserving a company name is not compulsory.
3.2 Minimum Capital
There is no minimum capital required to start a private company.
3.3 Employees
The Private Company can employ staff. Permanent staff will have to be registered for UIF/CF at the Department of Labour. Permanent staff will also need to have a Tax Number from SARS.
3.4 Tax
When the Company is registered at CIPC, it will automatically be registered with SARS and will receive a Company Tax Number. Thereafter, the Company must register on SARS eFiling.
If the Company has employees, then it is responsible for paying over the Pay As You Earn taxes for the employee to SARS.
The Company is required to submit an Annual Return to SARS.
Based on the profits, it will be required to pay the appropriate taxes.
3.5 Advantages of a Private Company
- It is a separate legal entity.
- This type of company registration can be for a small, medium or large company. This allows for flexibility and growth.
- It has a Memorandum of Incorporation (MOI).
- It is easier to obtain funding or to raise capital. This will help the company to grow.
- Transfer of ownership is easier.
- The life of the company can exist forever as long as it is compliant with CIPC or it will be deregistered.
3.6 Disadvantages of a Private Company
- Although it is a separate legal liability, SARS has made certain obligations for the payment of taxes unto the shareholders, directors or those managers that are directly involved in for the company’s financial affairs.
- Apart from it being the separate legal entity, the Directors and management can also be held to account when they have been reckless in running the business. They may be accountable (personally liable) for any debts owed by the company.
- Costs more than to start and operate a business than a Partnership and Sole Proprietorship.
- Has more legalities and compliance for the directors.