Starting a business is an exciting adventure, but it can be an extremely daunting and stressful task if you do not know how to address the many legal aspects your business will face. In this guide we will briefly evaluate the decision you need to make from a legal perspective. The first important decision to make, is decide on the structure of your business
When looking to start a business, the first important decision to make is the structure of your business.
The structure of your business
There are few business structures which you may choose from, the common ones of which include:
When selecting a business structure, some of the important factors to consider in this decision are the following:
Do you want bear personal liability for business activities?;
Would you like the business to continue even when there is a change in the ownership/ control?;
Management structures and control;
Legal formalities / registration formalities / administrative formalities;
Growth and expansion;
Below we have set out descriptions of some of the salient features comprising the different business entity types.
This is the simplest form of business structure. There are no registration formalities to start a business as a sole proprietor, as the business structure is an informal one. The business is headed by a single person, the sole proprietor.
This form of business structure is common if you are a freelancer as you naturally work alone, like a photographer or a social media influencer.
Advantages of choosing the sole proprietor structure include the following:
Sole ownership and sole right to profits- you get to enjoy your profits on your own and do not need to share ownership and control with anyone else.
No registration requirements – as a sole proprietor, you are not required to register the business, which makes it easy to start.
Very few formalities and costs – starting the business is inexpensive.
One the other hand, disadvantages of choosing the sole proprietor structure include the following:
High personal risk – the debts and liabilities of the business become your personal debts and liabilities. This means that creditors of the business can go after your personal assets such as your home or car in order to satisfy debts owing to them from your business.
Risk – you bear all the risks of starting and operating capital alone.
Tax – you will be personally subject to income tax on a sliding scale up to over 45%.
No perpetual succession- should anything happen to you, your business dies with you.
The sole proprietor business structure is only advisable (if ever) should you be starting a small business, to test the waters of your business and its potential success, prior to converting into another, more formal, business structure at a later stage, once the business has proven itself.
A partnership structure is much like a sole proprietor, except it involves more than one person. A partnership is an structure in which all partners normally participate in the management and in sharing profits and losses of the business.
The advantages of a partnership structure include:
No requirement for registration- While is it in the best interests of partners to enter a Partnership Agreement, there is no formal requirement that the partnership be registered.
No restriction on the number of partners you may have.
Partners share risk of liabilities and losses.
Partners can benefit from the skills or capital of other partners for business purposes.
The disadvantages of a partnership structure include:
There is no perpetual succession- If partners change or die, then the partnership is dissolved.
No separate legal personality from its owners- The debts and liabilities of the business become the partners personal debts and liabilities. This means that creditors of the business can go after each partners personal assets in order to satisfy debts owing to them from the partnership.
There is high personal risk- Related to the above, partners are ultimately liable for the debts of the business. If one partner makes a reckless decision, then all partners could ultimately be liable.
Tax– Partners will be liable for personal income tax on a sliding scale of up to 45%.
A partnership can be a decent structure as the business benefits from the skills and capital of more than one person. For example, say you are an excellent photographer but you edit or shoot videos, you can form a partnership with a videographer and start a partnership that benefits from both your skills and resources.
Much like a sole proprietor business structure, partnerships are only advisable should you be starting a small business, to test the waters of your business and its potential success, prior to converting into another, more formal, business structure at a later stage, once the business has proven itself.
A company is a legal entity registered in terms of the Companies Act with the CIPC having its own ‘legal personality’ and which is formed for the operation of a business.
There are many advantages of starting your business as a company, some of which include:
A company has a separate legal personality, which means that you will generally not be personally liable for the debts of the company. Further, assets of the business are owned by the company and not to the shareholders.
Related to the above, there is low personal risk, as shareholders have limited liability.
There is the benefit of the Companies Act to fall back on which provides a great base level of protection for the directors, shareholders and the company itself.
Profits of the company belong to the company itself and not the shareholders until and only if a dividend is declared.
There is perpetual succession- Should something happen to a shareholder or should a shareholders leave the business, provided that there are other shareholders, the business may continue without you.
It is often easier to raise capital for the business, because the company can sell shares of the company.
There is a split between ownership and management of the company. The Board of Directors control the business while the Shareholders own the business.
Tax is charged at a flat rate of 28%.
There are some disadvantages of electing to form a company, which include:
The Companies Act imposes strict registration requirements which may be tedious, costly and time consuming.
There are many legal formalities imposed by the Companies Act that need be complied with.
Company documents are open to public scrutiny. For example, the Companies Memorandum of Incorporation is publicly available, and an audit of financial statements may be required in certain instances.
We recommend that when starting a business, a company should always be the default go to as the appropriate structure.
Types of companies
There are two broad categories of companies namely non-profit making and for profit making. The difference between the two, other than the profit-making goal is that profit companies have shares while a non-profit company does not have shares. Instead of shareholders a non-profit has members and/or directors.
These are the types of profit companies:
1. Private company – (Pty) Ltd
This structure is by far the most common company structure utilised, and unless there are compelling reasons otherwise, this type of company structure should be pursued.
A private company is owned by its shareholders, and run by the board of directors. Often, especially in smaller businesses, the shareholders and directors may be the same persons.
Private companies are constituted by a Memorandum of Incorporation along with, very often, a Shareholders Agreement which, when read with the Companies Act, set out the governing relationship between the shareholders, directors and company.
2. Personal liability company - (Inc)
This form of company is often only required in instances of a governing body which requires its professional members to form such a company. This is the case for both attorneys and doctors.
In this instance, the shareholders are required to take personal liability for the debts of the company, much like a sole proprietor or partnerships, allows the company to benefit from perpetual succession should shareholders die or leave the company.
3. Public Company
In a public company shares may be offered to the public; and /or shares are freely transferable.
Due to the public nature of the company, the company has increased accountability requirements.
The following are some of the requirements of a public company:
Social and ethics committee;
Financial statements must be auditeds.
Most public companies started as private companies that, after meeting all regulatory requirements, opted to become public to raise capital. It is very uncommon that you would elect this structure when starting a business. Examples of public companies include Google, Vodacom and Glencore.
A non-profit company is a company with public benefit object, or object relating to cultural/social activities or communal / group interests.
Even though a company might be an NPC, it can still make profits, but the profits, cannot be distributed to its members, directors offices or other persons.
If you are starting a business to retain profit for yourself then this is not the structure for you. This company structure is only advisable for businesses that are for public benefit or other have as its object cultural or social activities, or communal or group interest. This might be, for example, a church, or wildlife research and conservation.
Registration of a Company
Once you’ve decided which business structure is best suited for your business, you need to think about registering the business. As stated above, the sole proprietor and partnership structures do not require you to register your business.
Company Registration at the CIPC
If your chosen business is a company, registration with the CIPC is required. It is a short process which normally takes a maximum of a week.
Company registration are done through the Companies and Intellectuals Property Commission (CIPC), at the following link: https://eservices.cipc.co.za/.
In terms of the Companies Act, 2008, a company may be registered with or without a company name. When a company is registered without a reserved name, its registration number automatically becomes the company name. This is the quickest way to register a company.
You may apply for between 1 and 4 options as names during each application process, whilst only one will be reserved. Each name reservation application costs R50. A company registration may vary between R125 and R475 (R125 for a private company, R475 for a non-profit company).
Here are some of the documents you may be required to submit to the CIPC in the process of registration:
Certified identity copy of applicant;
Certified copies of the Identity Documents of the Directors and Incorporators;
Certified passport copies are only accepted as proof of identity for non-residents of South Africa. For South African residents a green bar-coded/ smart ID copy must be lodged (certified).
The name confirmation certificate if applicable;
Power of attorney (if applicable) if someone is registering the company on your behalf.
BBBEE Certificate or Affidavit
Broad-based Black Economic Empowerment (BBBEE) is an integration programme launched by the South African government to reconcile South Africans and redress the inequalities caused by Apartheid. It encourages businesses to integrate black persons and other persons of colour into their business.
If you’re just starting out, you probably need a B-BBEE Affidavit rather than a B-BBEE Certificate. Businesses which earn less than R10 million in turnover (sales) per year may depose to a B-BBEE Affidavit which is a simple and quick alternative to the process of obtaining a certificate.
What is a B-BBEE Affidavit and how is it different to a B-BBEE Certificate?
An Affidavit is a form of self-declaration or deposition made under oath. A B-BBEE Affidavit is a self-declaration of your business’s Black Economic Empowerment status which needs to be stamped by a Commissioner of Oaths. After it has been stamped (commissioned), it will serve as your legal B-BBEE document for that year.
Where can I get a B-BBEE Affidavit or a B-BBEE Certificate?
You can order a B-BBEE Certificate on the CIPC’s ePortal.
Employer Tax Registration at SARS
When your business employs someone, you need to register as an employer at SARS within 21 days.
How do you register as an employer?
You can visit the SARS website for guidance on the process of employer registration.
COID Registration (and a Letter of Good Standing) at the Department of Labour
The Compensation Fund helps your business cover certain medical or remuneration costs in the case of any work-related harm or injury to your employees. In order to get this financial support, you need to contribute a small fee each month to the fund. This sum is determined as a percentage of your employees’ salaries. If any of these fees are outstanding none of your employees will be covered.
How do you do COID Registration?
You can register for COID directly with the Department of Labour.