Types of business structures

Once you have made the decision to start your own business, it is important that you understand the different types of business entities that exist and make the decision of which type of business structure you would want to set up. According to, The Companies Act 2008, the following types of business structures can be set up in South Africa:

Sole Proprietor: As a sole proprietor (sole trader), you can trade under your own name and do not need to register another legal entity. Even though it is the easiest form of business to set up, you must inform the tax authorities of your source of extra income. You will be taxed according to the personal income tax rates. As a sole proprietor you will be allowed to have employees but will not be permitted to have partners.

There is no distinction between the sole trader’s own assets and liabilities and those of the company.  Changes in the company’s assets will affect the personal accounts of the sole proprietor. Remember that you as a sole proprietor will be liable for any possible business debts.

Private company (Pty) Limited : It is a separate legal entity and must be registered as a separate tax entity, which means that it is compulsory to submit annual returns for your Pty Ltd. A private company is owned by shareholders and this type of structure is managed by its directors. It should be stated in the name of the company that it is “Proprietary” (Pty) or “Limited” (Ltd).

Personal Liability Companies (Inc.): A personal liability company is a private company which is commonly used by companies of doctors, lawyers or accountants. These entities can be held jointly by both current and previous directors. They are also held responsible for all possible liabilities that occurred during their time at the position.  Tax is only paid once, by the individual, not the company. It is only paid on the profits (salaries / bonuses) that are paid out to the members of the Personal Liability Company Inc. The Company itself does not pay taxes on its profits. Note that the company’s name must end in “Inc.”

Public Companies (Ltd.): These companies issue shares and are often listed on a stock exchanges. They are managed by a Board of Directors. Public companies are responsible to shareholders.

Non-profit companies (NPC): Are founded to serve a public benefit purpose. The income of these companies cannot be distributed to its shareholders, members or directors (except for reasonable compensation for their services).

The name of the non-profit company must end with “NPC”. At least three founders must complete and sign the Memorandum of Incorporation (MOI). The company must have a minimum of three directors. A slightly different Companies Act applies to non-profit companies. All of the assets and income of a NPC should be used to support and finance its stated objectives, as set out in its (MOI).

State Owned Companies (SOC): These companies are owned by the State or by a municipality. Most of the arrangements for settling a public company apply to state owned companies.

Business Trust: A business trust is defined as a trust where the trustee uses the trust assets to do business for profit in order to benefit the trust beneficiary or to further the aims of the trust. The trust can be used to protect your assets against personal creditors. The taxes related to trusts are simpler and the administration costs are lower.

Foreign and External Companies: These are companies that were founded outside of South Africa. These companies are generally not allowed to offer securities to the South African public. This is possible only if the company follows specific outlines from the Companies Act.

Close Corporations (CC): close corporations are no longer founded.