Types of businesses and their legal and tax implications
Definition: A sole proprietorship is a business that is owned and operated by a natural person (individual). This is the simplest form of business entity. The sole proprietorship is not a legal entity. The business has no existence separate from the owner who is called the proprietor. – SARS
A sole proprietorship, which is often referred to as a sole trader, is a business structure that is owned and run by one individual.
Typical sole traders include the man-in-a-van type of occupation such as a plumber or electrician. However, the term can also apply to people who run small, web-based businesses from home.
This is the simplest and the most common type of business out there. The sole proprietor is responsible for everything the business does. He/she trade under their own name, with no separation of assets and liabilities. This means that they will be held personally liable for any debts that the business incurs.
The sole proprietor is individually liable for all taxes. The profit is taxed according to the individual tax tables. This is beneficial for sole traders with a low income as they can make use of lower tax rates and deduct the tax rebate allowable to individuals. However, once the profit increases to be taxed above the company tax rate of 28%, it is more beneficial to create a company.
The proprietorship is a ‘trade as’ business and does not need to be registered at any government organization.
Individuals do, however, need to register for PAYE and Workmen’s Compensation once they employ staff. They also need to register for VAT once their turnover reach R1m.
Definition: A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labour or skill, and expects to share in the profits and losses of the business. – IRS
Partnerships are typically found in professional services such as accountants, lawyers, doctors, dentists etc, where the partners can share expertise and skills. They can also share the workload, organising work quotas to allow for time off and holidays. Partnerships comprise 2 – 20 people and any profits, debts and decisions related to the business are shared. Profits are shared at a predetermined ratio.
As per a sole proprietorship the partnership is not a separate legal entity, leaving partners liable for debts.
The same tax benefits and risks apply as with the sole proprietor.
Definition: A company is a legal entity made up of an association of persons, be they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise. – Wikipedia
Companies are owned by a shareholder/s who each put an amount of money into a central pool. This pool of capital is then added to by borrowing and other forms of finance. Directors run the company on behalf of shareholders, who receive a share of the profits. Directors and shareholders may also be the same person/s. Each shareholder receives a portion – or share – of the company that is equivalent to what they put in.
Private companies are seen as separate legal entities and as such are taxed in their own right and offer the shareholders protection against liabilities.
Companies are taxed at a flat rate of 28%. Tax benefits exist for small or micro enterprises. Terms and conditions apply!
A (Pty) Ltd will require registration at the Companies and Intellectual Property Commission (CIPC), which is a government organization.
The company also needs to register for PAYE and Workmen’s Compensation once it employs staff and need to register for VAT once the turnover teaches R1m.
Personal Liability Companies
If a company incorporates under section 8(2)(c) of the Companies Act the terms of its memorandum of incorporation (MOI) state that the directors and past directors are jointly and severally liable, together with the company, for any debts and liabilities of the company, as are or were contracted during their respective periods of office. Typically this means professions such as attorneys and accountants that make use section 8(2)(c) of the Companies Act.
Non-profit Companies (NPC)
A non profit company is incorporated public that is established, as an example, for some form of cultural or social activities or communal / group interests. Income is not distributed to any stakeholder from this type of business structure.
This is very similar to a NPO. Both may apply to be tax exempt.
Definition: A franchise in its’ simplest form is an agreement or license entered into by two parties, the franchisor and the franchisee. – Which Franchise
Franchises are licensing arrangements whereby an individual or group can buy the right to trade and produce under a well-known brand name in a given locality. A franchise involves you using another company’s successful business model – and name – to establish your own business. The franchisee benefits from working for themselves while having the privilege and reputation associated with a much larger group.
Franchisees are taxed according to a sole proprietor or a company, separately from the franchisor.
Definition: Limited liability is a type of liability that does not exceed the amount invested in a partnership or limited liability company. The limited liability feature is one of the biggest advantages of investing in publicly listed companies. – Investopedia
Limited liabilities are intended to benefit professional partnerships such as lawyers, doctors etc. They offer a form of business protection for company shareholders and some limited partners. For these individuals, the maximum sum they can lose from a business venture that goes under, is the sum of money that they invested in the company.
Limited liability allows the members to limit their personal liability if something goes wrong with the business.