Choosing a legal entity for your business

15 May 2017 by Nazeem Martin

One of the first and most important decisions an entrepreneur has to make is what type of legal entity to register his business under. There are many factors to consider and all the pros and cons must be weighed, as the wrong choice could be a costly mistake.

The business format will depend very much on the nature and size of the business, and should suit the entrepreneur’s individual needs.

Some forms of enterprise must be registered with the Registrar of Companies, and need to meet certain legal requirements, while other entities simply need to be given a name and can then start operating immediately.

There are various types of business formats suited to the SME sector, each with its own distinct characteristics.

Sole Proprietorship

Where there is only one owner, this is the simplest kind of independent business, as it does not need to be registered as a legal entity. This makes a sole proprietorship the ideal choice for a professional in private practice, a guest house owner, or the owner of a small craft business, for example.

On the other hand, there is no distinction between the business and the owner, which means that the owner is fully responsible for all debts and liabilities incurred by the business.

A Partnership

To put is simply, a Partnership is an association of 2-20 people who are contractually bound to operate a joint, profit-generating business. Each partner contributes money, goods or services to a fund, agreeing that profits will be shared between the partners as per their contract.

A Partnership is quite inexpensive to set up, as it does not have to be registered at the Registrar of Companies. The characteristics of a partnership include:

• Each partner must make a contribution to the Partnership

• It does not have a juristic personality separate from the partners. Each partner can bind the Partnership

• If the Partnership’s estate is sequestrated, the estates of the partners can follow unless the partners undertake to pay the debts of the Partnership

• On dissolution, the profits and net assets are usually distributed amongst the partners

• The life of the Partnership is not separate from the lives of the partners (so if one partner dies, leaves or is declared personally insolvent, the Partnership becomes null and void)

• On dissolution, the assets are liquidated, creditors are paid and partners must stand in for any shortfall

• The Partnership is not a “person” for tax purposes and not taxed as a company would be

• There are no statuary audit requirements

These points can be seen as advantageous or not, depending on the needs and circumstances of the owners. Once again, entrepreneurs need to seek professional guidance on registering and running a partnership according to the legal requirements.

Private Company

Despite the complex nature of setting up and running this type of business, a Private Company can be a good choice for medium-sized enterprises with up to fifty shareholder. The most obvious advantage is that the law sees the company as its own legal entity, so shareholders are not personally liable for its debt.

Among other things, a Private Company:

• Must reserve and register the company name with CIPC

• Must have strict laws governing the duties and responsibilities of the company’s directors and officers

• Must have a Memorandum of Agreement defining the company’s nature and purpose

• Must hold an Annual General Meeting and issue annual audited financial statements

• Must have registered Articles of Association