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 long-term consequences that could hinder your venture’s success.
There are several legal entities which entrepreneurs can choose between:
Personal liability company (for members of professions such as attorneys, medical practitioners, accountants or quantity surveyors)
Combinations of legal entities
The structure of business you choose depends on the nature, offering and size of your company, your specific business needs and often taking tax into consideration. It is beneficial to structure your company in a tax-savvy way, but should also never select a particular structure for tax purposes alone as there may be general disadvantages that outweigh the advantages of some structures for your specific business.
The following aspects should also play a role in your selection of the optimal legal structure for your business:
1. Number of 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.
The number of owners, directors and shareholders, plays a significant role in how you choose your legal structure. It would be beneficial to commission an expert to help you make this decision effectively at the start.
It is of vital importance that if your business continues in the event of the death, retirement or resignation of one or all of its owner(s); so consider 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.
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. Each legal structure’s cost of administration differs, for various reasons, however, should the benefits of a specific structure you select outweigh the cost, we recommend incurring the additional cost of administration to improve longevity of your business.
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.
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 seed finance from outside the business in the form of loans - bank loans, small business lenders, and from friends and family. Private companies can opt to sell shares in the company to investors, and thus more options become available for financing the business. However, be careful which option you go for as the decision can have lasting impact, especially if you are selling equity/shares in your business to an investor who doesn’t align with your vision.
7. A Combination of more than one legal entity can be beneficial
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.
It’s important to note that deciding on the legal format of your company can be challenging; but once you have the right structure, the sky is the limit. We advise recruiting the help of legal experts in the field of business ownership and structure. A decent 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.
Our industry expert Legalese can assist you with all of your legal requirements, head over to their business page to access their contact and service information.