When you start your own business, the last thing you think about is anything “legal”. You do not think about what you should register as – for example as a partnership or as a company. You basically just start working. You need a product or service and most importantly – you need clients.
In part 2 of this series: You and Your Business – I want to cover the legal framework of your business. The legalities of setting up; and which option would suit you and your business best. It is important to remember why you have set up your business: to work for yourself; to generate an income and to build up business equity. The reason for building up an equity is for you to sell your business one day. How you structure your business now, will affect your ability to sell it later.
The first option is to run your business as a sole proprietor; meaning you operate as yourself. Many professional people operate as sole proprietors. The advantages is that you do not need to register as a legal entity as you are the business. You pay tax as a provisional tax payer and your financial statements do not need to be signed off by an accountant. The disadvantage is that you are held personally liable for any business losses you incur. Another disadvantage is that contracts and memberships are linked directly to you. If you want to sell your business or you pass away, those contracts and memberships are not transferrable as the contract was drawn up with you and not with a separate legal entity.
If you operate as a sole proprietor, I recommend you draw up proper monthly and annual financial statements; ensuring transparency in your business. I also recommend you draw up a succession plan in the event of you becoming disabled or death; ensuring continuity for your clients and the business. A successful succession plan will protect your dependants who are financially dependent on your income and provided continuity for your business and clients.
The other legal entities are partnership or companies. Unfortunately you can no longer set up a new CC (Close Corporation) but you can buy old CC’s if someone is selling theirs. A partnership is where two or more individuals partner and join pool money, skills, and other resources, and share profit and loss in accordance with their partnership agreement. Like with a sole proprietor losses are the responsibility of the shareholders and contracts are with the individuals of the business and not the business itself.
I would recommend drawing up to date financial statements and draw up a succession plan. This can easily be done thorough a buy and sell agreement, which protects both partners in the event of death or disability of another partner.
A company is a legal registered entity and controlled by its shareholders. Personal assets are protected, unless personal sureties have been signed and contracts are transferable if the business is sold as the contracts belong to the company. Annual statements have to be signed off by an auditor and tax is paid at a flat rate of 29% and 10% of dividends if any are distributed.
How have you set up your business? Have you given it any thought or have you just built your business? How you structure your business affects the tax you pay; your personal assets; and your ability to build up equity in your business.
Please drop me an email to info@sigridmadonko.com if you want to take your business seriously and have its legal entity reviewed
Regards, Sigrid
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