25 Nov Choosing The Right Corporate Structure For Your Business
Starting a new business is filled with excitement and a fair amount of uncertainty. It’s easy to get caught in the thrill of your new venture and forget to really focus on choosing the best legal structure for your business. Choosing the right corporate structure is one of the first things an entrepreneur should do when starting a business as it could have long-term consequences.
Deciding on the right structure from the start can spare you the headache later on.
Each corporate structure has different advantages and disadvantages. Factors like the size, nature, and ownership of the new business all have an impact on the decision for the new venture.
It’s also important to note that each entity has different effects on taxes, personal liability, administration costs, paperwork and ability to raise funds.
The four main legal corporate structures that entrepreneurs can choose from are:
1) Sole Proprietorship
A sole proprietor, also known as a sole trader, is a person who trades in his or her personal capacity. It’s the simplest form of business and does not require a business name or to register the entity. You will have to register with SARS for tax purposes.
A partnership is similar to a sole proprietorship, but with more than one owner. It has similar benefits and drawbacks with a few disadvantages.
3) Private Company
A private company is a separate entity that is registered with the Companies and Intellectual Property Commission (CIPC). The private company has both shareholders and directors.
4) Business Trust
A business trust uses the trust assets to do business for profit to benefit the trust beneficiary, or to further the objectives of the trust. The maximum number of trustees a business trust can have is 20.
Important factors to take into consideration when choosing the right corporate structure your business is:
a) The Number of Business owners
Sole Proprietorship’s can only be used by one owner.
However, if you are the sole owner, you may also use a private company, an incorporated professional practice, a business trust or a combination of legal structures.
This an important factor to consider if you want your business to continue after your death:
- A sole proprietorship is an entity that is not separate from your personal estate. The business will cease to exist after the owner dies.
- A partnership dissolves upon the death of any one of the partners.
- A private company is a legal entity that is separate from the owner’s personal estate and will offer continuity of the business after the owner dies.
c) Administration Costs
A sole proprietorship will not incur you any additional costs; however, using a private company will. The benefits you receive from a particular structure should outway the costs, making the administration costs worth it. Focus more on the benefits the structure offers.
Each legal entity is taxed differently. Sole proprietorship’s and partnerships are taxed according to individual income tax scales. A private company is taxed at a flat rate of 28%. A business trust is taxed at a flat rate at 45%.
The different entities are also treated uniquely for capital gains tax purposes.
One of the main factors business owners must take into consideration is what will happen to their personal assets if the business goes insolvent. In a sole proprietorship or partnership, the owner’s personal estate is always at risk. If you trade as a private company or trust, your business assets and personal assets are separated. In the event of the business goes insolvent, personal assets will be protected, providing you did not sign a surety in your personal capacity for business debts.
f) Business Financing
A sole proprietorship, a partnership and a trust may only raise finance from outside the business, for example, a loan. While a private company can sell shares within the business to an investor. This provides more options for growing the finance of the business.
Choosing the right business structure is an important decision. The entrepreneur needs to understand the pros and cons of each structure. Get it right from the start as choosing the wrong structure or changing to another structure, later on, can be a costly affair.