Chapter 2
Which business type do you wish to set up?
Which structure of business best fits your business?
There are several ways to structure the ownership of your business, depending on the type of business, the number of employees, management capabilities, personal risk and future plans.
Sole proprietor/sole trader: This is best suited to a business that is not fixed asset-driven (ie, is service-based) and in which the owner is the sole employee. Income accrues directly to the owner and there are no complicated statutory returns other than meeting basic legal and tax requirements. The disadvantage is that the business is not a separate legal entity, so the owner is liable for, and can be sued for, the business’s debts. If the owner of the business dies, the business ceases to exist.
Partnership: Based on the same principles as a sole proprietorship, this structure allows you to have up to 20 partners who share responsibility, skills and liability.
A partnership requires a contract to formalise each person’s contribution to the business, their responsibilities, profit share, means of resolving disputes, disability/death insurance, and what procedure will be followed if the partnership changes or is dissolved.
Finding funds for a sole proprietorship or partnership depends on the security that the individual owner/partners are able to provide.
Company (Pty) Ltd: This is also a separate legal entity in which directors are protected from individual liability.
A company can make shares available to staff as a private company (Pty) or to the public as a limited company (Ltd), and these are easily transferred from one owner to another. (Pty) Ltd companies are subject to an annual audit. This is the best legal structure for people who ultimately want to sell their business to a large competitor, or list on the stock exchange.
Tax implications
Tax laws vary from country to country, so do your homework before starting or expanding your business into a new region. The following are general guidelines on how different businesses are usually taxed. Generally, a sole proprietor is taxed as an individual, so the more your business earns, the more tax you pay.
When several people run a business in partnership, they are usually taxed as individuals on their share of the profits. The more they earn, the more they pay.
(Pty) Ltd companies usually pay a constant rate of tax regardless of income level. They are also usually subject to an annual audit.
By:. KINGSLEY OPPONG –SEKUM