Types of business entities

If you're thinking of starting a business, one of the first things you'll need to think about is how it will be structured. In South Africa, all businesses, for example companies, are governed by the Companies Act, No 71 of 2008, and registered by the Companies and Intellectual Properties Commission (CIPC). Here's a high-level summary of what you need to know:

Not for Profit

Previously known as a Section 21(b) company, a non-profit company doesn't operate for a profit, but rather for a public benefit, or one that relates to a cultural, social, communal or group interest. In a non-profit company, income and property can't be distributed to its members or directors, but must rather be applied to the company's main objective. The company can be incorporated by three or more people, and needs a minimum of three directors.

For Profit companies

Sole Proprietorship

A sole proprietorship is the simplest and most common form of small business operating for profit, and involves a single individual owner (though it can have employees). The business can operate under a trade name, or under the name of the owner. With this type of business structure, there's no limited liability - so the business owner's liability includes his personal assets. In the same way, any profit that the business makes is seen as the owner's personal income by the taxman.

Partnership

A partnership is an association of between two or 20 people who are contractually bound to each other to operate a profit-generating business. Each partner contributes funds, products or services, and in return, the profits are shared between partners as per their specific contract with each other. A partnership is a cheap option to choose, as it doesn't need to be legally registered.

Public Company (Ltd)

This type of for-profit company can offer shares to the public. If you want to be listed on the stock exchange, you'll need to create a public company. It can be incorporated by one or more people, and requires a minimum of 3 directors and one member, but there's no limit to how many shareholders it can have. A public company also requires a company secretary, an AGM and must be audited, and is regulated by both the CIPC and the JSE.

Private Company (Pty) Ltd

Like a public company, a private company also trades for profit, but may not offer its shares to the general public. It can be formed/set up by one or more people, and needs to have a minimum of one director and one shareholder. A private company cannot have more and the directors don't need to be South African citizens or residents.

Personal Liability Company Inc.

A personal liability company is private and operates for profit. Typically used by professional associations, the current and past directors of this kind of company are jointly and severally liable for the company's debts. A Personal Liability Company needs to have a minimum of one director and one shareholder.

Read more about company structures here.

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