STARTING A BUSINESS IN 2017: THE PRIVATE COMPANY OPTION

Source: , 03/01/2017

STARTING A BUSINESS IN 2017: THE PRIVATE COMPANY OPTION



Let’s move on to the private company option, where your business is
owned and operated, not by you as an individual or by a group of
individuals, but by a “(Pty) Ltd”.

Although CCs (close corporations) still exist, no new ones are
registered, so we will not consider them here other than to note that
the owners of a CC are “members” not “shareholders”).


What is a private company?
Our law treats a private company as a separate legal entity, a
“judicial person” with its own “legal personality”. It exists in law
separately from its managing officials (directors and management
employees) and its owners (shareholders). You can have as many
shareholders as you want (the old limit of 50 has fallen away).

Your personal assets are separated from your business risks. In fact
the whole concept of modern laws recognising separate “corporate
entities” traces its roots back to the idea that entrepreneurship
would be encouraged when individuals could limit their trading
liability to their own investment in the business.

Like sole traders and partnerships, a company can use a separate
“trading as” name like “XYZ Enterprises (Pty) Ltd t/a Plucky Plumbers”
perhaps. But it’s always the actual company that trades, contracts
and pays tax.


7 advantages of private companies…..
1. A company has “perpetual succession” â€" it survives the
death/incapacity/insolvency/exit of the directors and shareholders.
That carries a host of practical benefits, including making it a
possible estate planning tool.
2. Transferring ownership and management is easy â€" shareholders and
directors change but the company lives on.
3. Directors and managers have limited liability. Note however that
directors and senior managers can be held personally liable in cases
of reckless or fraudulent trading, non-compliance with statutory
duties and the like - the “new” Companies Act in particular has
imposed a whole new set of duties and risks in this regard. Bear in
mind also that that your limited liability falls away to the extent
that you sign personal surety for company debts.
4. Shareholders are in general not liable for the company’s debts,
although they do risk liability for some tax debts e.g. if they
control or are regularly involved in the management of the company’s
financial affairs.
5. It is generally easier to raise funding for a company than it is
for a sole tradership or partnership.
6. Similarly, a company is adaptable to both small and large
businesses, so if you are starting off small but planning to grow
substantially, consider using a company from day one.
7. Tax: Sometimes an advantage ….. see below.

….. and 3 disadvantages
1. Formation: Unlike sole traderships and partnerships, companies
require formal registration and compliance with various formalities.
Factor the attendant delay and cost into your plans. Using a shelf
company can reduce the hassle but make sure you buy it from a
reputable business.
2. Costs of administration: Prepare for a higher administrative and
regulatory burden than with your other choices. Factor in both the
time and financial costs of complying with the host of legal
requirements, statutory returns and general red tape associated with
companies. Find out up front for example whether you are going to
have to pay for a full audit or independent review every year.
3. Tax: Sometimes a disadvantage ….. see below.

The tax angle
It is impossible to give general advice here; seek specific guidance
on what is the most tax-efficient entity or structure of entities for
your particular situation. Consider the different tax rates applying
to corporate entities for income tax, capital gains tax, transfer duty
etc; also the implications of dividend tax, estate duty, exemptions
and rebates only available to individuals and so on.

The bottom line is this - take full professional advice on both the
legal and the tax implications of using each type of entity before
choosing.

This is the fourth article in our series “Choosing the right legal
entity for your business”. Next time we’ll look in more depth at the
business trust option.