The registration of a new business entity comes with structural, legal and other consequences. Also when acquiring an existing business, it may be prudent to reconsider the type of entity being deployed. This editorial seeks to highlight the basic differences between the available options and to provide a brief summary of the main characteristics of each.
A close corporate (“CC”) is a limited liability entity, which has its own distinct legal identity separate from those of its owner(s). CCs are frequently encountered in South Africa and are often deployed by small to medium businesses. The reason for the popularity of this business structure is its relative simplicity and informal processes. For example, the CC is not required to have its financials audited by a chartered accountant. Only natural (living and breathing) persons are allowed to hold the members interest in a CC and other legal persons may only do so under limited circumstances such as a Trustee of a testamentary or inter vivos Trust provided that a juristic person is not a beneficiary and the total number of members, including beneficiaries does not exceed ten.
A Close Corporation:
Since implementation of the Companies Act (Act 71 of 2008) (“the Act”) on 1 May 2011, no new CCs are capable of being registered and no conversions from companies to CCs are allowed. Existing CCs will endure for the foreseeable future.
With the advent of the Act, the legislator made allowances to entrepreneurs to fashion companies in ways which cater better for their specific needs. Companies are suitable for conducting both larger and smaller businesses.
Some of the characteristics are:
A sole proprietorship is a natural person who conducts business and is perhaps the simplest form of a business structure. It does not have an identity separate from the owner and consequently, no limitation of liability in the way a CC or company has. All transactions are tantamount to the owner acting in a personal capacity and as such, no stipulations exist as to how the business should be conducted. The sole proprietor is the owner of the business' assets and, conversely, is also personally liable for all the debts.
The characteristics of a sole proprietorship are:
Although compelling reasons may exist for electing this form, such as its relative simplicity and taxation advantages in certain circumstances, the inherent risks associated with doing business have significantly reduced the popularity of this type in recent times.
A partnership is constituted by an agreement between 2 to 20 people to operate a business in partnership with each other. Each partner undertakes to contribute money, goods, services and the like and is entitled to share in the profits and losses of the business. No registration is required as a partnership agreement is simply concluded between the parties.
Some of the characteristics are:
Partnerships could be described as commercial marriages and unless this form is required by statute or preferred for some other compelling reason, great care should be taken when considering this form, as it poses significant liability risks to both the partnership and the partners in their personal capacities.
Gaining a basic understanding of the options available to entrepreneurs and having a working grasp of the characteristics of the form ultimately deployed, goes some way to minimise the inherent risks associated with conducting business. As each business’ particular circumstances are unique and as other business entity options also exist, it may be advisable to consult an expert before registration or conversion in order to ensure fitness for purpose.
Article by Gerhard Truter from Barnard Inc Attorneys situated at Centurion, Pretoria. November 2014
Barnard Incorporated is a firm of attorneys situated in Centurion, Pretoria.
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