Forms of Business Enterprise

INTRODUCTION
There are various types of business enterprises to choose from when setting up a business in South Africa. The decision as to which vehicle will be the most appropriate depends on a number of factors including the characteristics of each type of business entity as well as the advantages and disadvantages. The purpose of this article to it briefly outline each type of business enterprise which may be established by a prospective proprietor or entrepreneur.SOLE PROPRIETORSHIPA sole proprietorship is a business owned by a single individual who controls the business and who takes all the decisions

• Characteristics
  • There is only a single owner; there are no other partners or shareholders.
  • The business is not a separate legal person from its owner; the owner manages the business and enters into contracts on behalf of the business in his own name.
  • The sole proprietor is personally liable for all the debts of the business.
• Advantages and Disadvantages
  • Although there are no legal requirements for the creation or running of the business and the owner has full control over its daily operations, a sole proprietor does not enjoy the benefit of limited liability (no separate legal personality) or perpetual succession (that is, if he dies or retires then his business will come to an end).

PARTNERSHIPS

A partnership is an agreement between two or more parties who agree to finance and work together in pursuit of common business goals.

• Characteristics
  • There are two or more persons (such persons can be natural or juristic persons).
  • There must be a valid agreement between the parties which can be in writing or oral.
  • Each partner must contribute to the partnership.
  • The partnership must be carried on for the joint benefit of all the partners and the object of the partners must be to make a profit.
  • The partners are jointly and severally liable for the debts of the business.
• Advantages and Disadvantages
  • Partnerships are relatively easy to establish with no formal requirements for establishment. Partnerships can be formed for a single venture or for an ongoing business venture. A partnership can benefit from a complement of skills, moral support and creative thinking.
  • A partnership is not a “person” for tax purposes and each partner is taxed in their individual capacity which could lead to lower taxation.
  • A partnership has no separate legal personality and the partners are therefore jointly and severally liable for debts of the partnership. There is also no perpetual succession which means if the partners change the partnership ends.

CLOSE CORPORATIONS

A close corporation is an optional association of one or more natural persons, no exceeding 10 (ten) natural persons. It is no longer possible to form new close corporations but an existing close corporation may continue to operate indefinitely unless deregistered or dissolved. A close corporation may also be converted into a company.

• Characteristics
  • A close corporation is subject to the Close Corporations Act, 1984 and Companies Act, 2008.
  • A close corporation does not have shareholders but members. There can be between one and ten members, which must be natural persons.
  • Members do not have shares but “interests” which are expressed as percentages.
  • Members own and control the business.
  • Close corporations are required to appoint an accounting officer.
• Advantages and Disadvantages
  • A corporation is a separate legal person. Perpetual succession allows the corporation to exist indefinitely until registered or dissolved.
  • There is a limitation on the number of members permitted. No new close corporations can be registered.
  • A member can be held personally liable for the debts of the CC if such member acts carelessly on behalf of the business.

COMPANIES

There are two types of companies, namely profit companies and non-profit companies. Profit companies can be further categorised into private companies, personal liability companies, public companies and state-owned companies.

• Non-profit Company

A non-profit company is a company incorporated for a public benefit object or an object related to one or more cultural or social activities, or communal or group interests. A non-profit company may or may not have members. The board must comprise at least 3 (three) directors and all of its assets and income must be applied to advance its stated objects as set out in its Memorandum of Incorporation (“MOI”).

• Private Company

A private company’s MOI prohibits it from offering any of its securities to the public and restricts the transferability of its securities. The board must comprise at least one director. Not all private companies are not required to appoint an auditor, have a company secretary and otherwise comply with the enhanced accountability provisions provided in the Companies Act, 2008.

• Personal Liability Company

The personal liability company’s MOI comply with the requirements of a private company and must state that it is a personal liability company. The directors are jointly and severally liable for the debts of the company.

• Public Company

A for profit company is a public company if it is not a private company, personal liability company or state owned company. A public company may offer its securities to the public. The board of a public company must comprise at least 3 (three) directors and a public company must comply with Chapter 3 of the Companies Act, 2008 namely it must appoint an auditor, company secretary etc.

• State Owned Company

A state owned company is an enterprise registered in terms of the Companies Act, 2008 and is either listed as a public entity in terms of the Public Finance Management Act, 1999 or is owned by a municipality as contemplated in the Local Government: Municipal Systems Act, 2000.

• Advantages and Disadvantages
  • A company is a separate legal person. Perpetual succession allows the company to even if its shareholding changes.
  • Companies can have more owners than close corporations. The tax rate of companies is lower than the tax rate of individuals.
  • The structure of a company is more complex and it has separate ownership and management (shareholders own the company while the directors manage the company).
  • The Companies Act, 2008 has introduced increased accountability and liability for directors. Companies are the most regulated form of business enterprise.

BUSINESS TRUSTS

A business trust is an inter vivos trust which is created when the founder or donor of the trust enters into a valid trust deed (agreement) in terms of which he/she undertakes to transfer assets to the control of the trustees who in turn undertake to administer the assets for the benefit of the trust beneficiaries.

• Characteristics
  • Trusts are registered with the Master of the High Court with the submission of a number of documents.
  • The founder must have the intention to create a valid and binding trust.
  • There must be trustees and beneficiaries (note that it is possible to have one trustee and one beneficiary).
  • The trust object must be lawful and the trust property must be defined.
  • The powers of the trustees should also be listed.
• Advantages and Disadvantages
  • Although there are requirements for a trust to be valid, a trust is relatively simple to establish. As a trust is an agreement, it can be amended by agreement between the relevant parties.
  • A trust provides for limited liability as its liabilities are limited to the extent of its assets and trustees are only liable for the debts of the trust in their representative capacity although there are exceptions to this.
  • Trusts are flexible, allowing both natural and juristic persons to be trustees and/or beneficiaries and the trust can exist indefinitely (subject to the provisions of the trust deed).
  • Tax advantages are limited with the conduit principle allowing income and capital gains to be taxed in the hands of the beneficiaries instead of the trustee and the trust is not required to prepare financial statements. The affairs and documents of a trust can be kept confidential.
  • However, trusts are largely unregulated which results in disputes between trustees, beneficiaries and third parties being resolved through High Court litigation which is costly. Founders and trustees are often unfamiliar with the requirements of forming and operating a valid trust e.g. a single trustee wishing to control trust assets for his own benefit will result in the trust being invalid.

CONCLUSION

Due to the many various characteristics, advantages and disadvantages of the various forms of business enterprise, a prospective proprietor will do well to consult with a commercial attorney when making decisions in setting up a business in South Africa.