businessstructures

Business Structures | 2022

Firstly, there’s a difference between a business structure and an organizational structure, don’t confuse the two. The distinction is that an organizational structure defines how activities such as task allocation, coordination, and supervision are directed toward the achievement of organizational aims… while a business structure refers to how a company is organized, in regard to its legal status. This influences the day-to-day operations of a business.

When we talk of taxes, this is probably the most important decision you have to make. The most common forms of business are sole proprietorship, partnership, corporation, and S corporation… with limited liability company (LLC) and the limited liability partnership (LLP) being the most recent development to these forms of business. Each comes with a tax consequence, so choose wisely. It should match your business’s needs too. 

Sole proprietorship 

A sole proprietorship is when there is a single founder who owns and runs the business. It’s worth noting that in this form of business entity, the business is not separate from the owner. 

You own and have 100% control over your business and you are entitled to all profits, however, the risk is that if your business falls into debt, your assets will be seized to pay for business debt, and you are personally liable for any obligations.

If you decide to start your business as a sole proprietorship but later decide to take on partners, you can reorganize as a partnership or other entity. Be sure to notify SARS.

Partnership

This is established when 2 or more co-owners run a business together. Partners invest money, skills, and time into making the business successful. This means that you will have more capital to kick-start the business, more skills, and expertise, and you get to share the workload. 

The upside of a partnership is that you share control of the business – with which sometimes you might have different views, and dealing with people is not always seamless. Another important thing to note is that everyone is liable for debts whether they were caused by other partners or not.

Pty Ltd 

A Pty Ltd (proprietary limited company) is a private company and is treated as a separate legal entity. Even if you launch your business single-handedly, this type of business is registered as a separate legal entity. The owners of this kind of business are known as shareholders. 

Because the business is a separate entity, it continues to run smoothly even if you sell your shares or take on partners. Additionally, you/the shareholders are not liable for company debts. 

The limitation is that you can’t offer shares to the public or list the business on a stock exchange, as this is a private company. You can’t even go to meetings and make decisions alone, two shareholders must be at a meeting… except when the company only has one shareholder. 

Public Company (Corporation) 

A public company—also called a publicly-traded company—is a corporation whose shareholders have a claim to part of the company’s assets and profits. This kind of company trades its stock on at least one stock exchange. The daily trading of the public company’s stock determines the value of the whole business.

A Publicly traded company is different from a Pty Ltd in that shareholders can be anyone who purchases stock. With anyone being an equity owner of the business, this offers you more capital to work with, and the risk is spread out amongst the various shareholders. The more shareholders, the less risk everyone holds. 

It’s important to remember though, you will need to reveal some of your documents and annual accounts published for inspection to the public. This doesn’t enable you to guard your secrets effectively. And since there are more shareholders and leaders of the company, making decisions can take longer.

Franchise 

A franchise is a licensed business to a third party by the owner of a business. This gives anyone the right to operate the business or distribute goods and/or services using the business’s name and systems at a fee.

With this type of business, you can capitalize on the franchise’s successful track record and a positive reputation. On top of that, franchises have training programs designed to optimize how you run the business and bring you up to speed quickly, plus operational support. 

However, you will have to follow the rules, regulations, system operations, and directives of the franchise. It’s also worth noting that the cost of becoming a franchisee is high, and you are liable to pay royalties to the franchise for the use of their name and systems. 

Choosing a business structure 

The type of business structure will depend on the type of business and its needs. You can still switch between types as your business grows. 

You can start as a Sole Proprietor and eventually grow into a Pty Ltd or public company. Tell us in the comment – what type of business are you running or thinking of venting into?