One of the first decisions you’ll make as an entrepreneur starting a business is the legal structure of your company. The legal structure you select can have serious long-term consequences for your venture’s success.
There are several legal entities which entrepreneurs can select:
Sole proprietorship
Partnership
Private company
Business trust
Personal liability company (for members of professions such as attorneys, medical practitioners, accountants or quantity surveyors)
Combinations of legal entities
The kind of business you register with the appropriate authorities depends on the nature and size of your company as well as your specific business needs. You need to ensure that you structure your company in a tax-savvy way, but should also never select a particular structure for tax purposes only.
The following aspects should also play a role in your selection of the optimal legal structure for your business:
1. How many business owners?
A sole proprietorship can only be used by one business owner. However, even if you are the sole owner, you can opt to use a private company, an incorporated professional practice (should your professional association allow for the use of this legal entity), business trusts or a combination of legal structures.
2. Continuity
It is of vital importance that if your business continues after your passing, you select a legal entity which allows the following:
A sole proprietorship as a legal entity is not separate from your personal effects, and businesses operating as one, thus cease to exist after the owner passes.
A partnership will terminate upon the death of any one of the partners.
A private company is a legal entity separate from the personal estate of the owners, and will, therefore, offer you continuity of your business after your death.
Although an inter vivos (living) trust was never intended to be used as a legal entity for a company, it can be used as such. The assets will be owned by the trustees in their capacity as trustees and will, therefore, are separate from the private estates of the trustees.
3. Cost of administration
Running a business as a sole proprietorship costs nothing extra, but utilising a private company as a legal entity will incur costs on the other end. However, should the benefits you glean from the specific structure you select outweigh the cost, we recommend incurring the additional cost of administration.
4. Tax
Of course, the various legal entities available are taxed in different ways. Sole proprietorships and partnerships are taxed per individual income tax scales, which are currently at 18% and 41%. Private companies are taxed at a flat rate of 28%. On any amounts declared as dividends, 15% dividend tax will be levied, while business trusts are taxed at a flat rate of 41%.
Furthermore, the various legal entities are also treated differently in terms of capital gains tax purposes. Capital gains incurred by sole proprietorships or partners are included at a rate of 40%. As for private companies and trusts, the inclusion rate is 80%. Any legal entity is required to pay transfer duties on purchase prices of immovable properties on a scale of 0% to 13% of the value of the property.
5. Security
Every business owner has to ask the question: “What will happen to my personal assets if my business goes bankrupt”? With sole proprietorships and partnerships, the business owner’s personal estate is always at risk. However, if you operate as a private company or trust, your business and personal assets are separate. In the scenario where business becomes insolvent, your personal assets are protected, provided that you didn’t sign surety in your personal capacity for your business debts.
6. Financing your business
Sole proprietorships, partnerships and trusts can only seed finance from outside the business in the form of loans. Private companies can opt to sell shares in the company to investors, and thus more options become available for financing the business.
7. Combining legal entities
It’s also possible for business owners to structure their organisations to glean benefits from the different legal entities. For example, you can run your business as a private company, and set up a family trust which possesses shares in the business. By doing this, you can save enormous amounts of money in estate duty, as the share value in the company appreciates in possession of your trust and not your hands.
Conclusion:
It’s vitally important to note that deciding on the legal format of your company can be challenging. Thus we advise recruiting the help of legal experts in the field of business ownership. A niche lawyer can calculate the costs and benefits of all available options open to you and ensure the success of your business by selecting the best structure for your business needs.