Introduction:
You have made the decision to venture into the world of business, and now you face the task of choosing the specific type of business you want to establish. Alternatively, you may have already registered your business but are seeking a deeper understanding of the benefits and disadvantages associated with your chosen business type. It is crucial to be well-informed about the type of business you are involved in since each type carries distinct legal requirements and responsibilities.
This Blog's contents:
1. Sole proprietor
2. Partnership
3. Proprietary Limited Company
4. Public company
5. Franchise
6. Table summary
Types of businesses:
1. Sole proprietor
Most unregistered businesses operate in this manner. With this type of business, there is no separation between the business owner and the business. So, if the business owes someone money and can’t pay them back – the owner will have to pay the person back. Basically, what belongs to the business – belongs to the owner.
This is the main reason against this type of business. We all know that doing business is risky and uncertain. When you are a sole proprietor – the law doesn’t protect you from this. If you make losses and you owe people money – you will have to pay them back using your personal income and/or assets.
The other negative part on this arrangement relates to tax. Individuals pay higher taxes than registered businesses. Individuals can pay taxes up to 49% of their income and there are no taxable deductions. This means that individuals pay taxes on the total amount they received. Whereas businesses pay taxes on the income minus the expenses they had to pay to make this income. This generally reduces the total income that businesses have to pay taxes. But the tax rate for businesses is also lower than the tax rate paid by individuals. The highest tax rate that businesses have to pay is 28%.
It is thus generally more risky and more expensive to do business as a sole proprietor.
2. Partnership
Partnerships are similar to sole proprietorships; the only difference is that there is more than 1 person involved. The business is not separate from the owners. And so, what the business owns and owes belongs to the owners.
The same story holds true for how much tax the partnership gets to pay. In a partnership, each partner pays tax individually. They pay the tax on their personal capacity. With that, they end up paying tax at a higher rate (individuals rates as opposed to the corporate tax rate
3. Proprietary limited company
This is the famous PTY LTD companies. You register a ‘for-profit’ business with the CIPC.
The main difference between this and the companies we have seen before is that PTY companies are seen as legal persons. The law sees this business as being separate from its owners. This means that whatever money it makes belongs to the business, whatever it owes is owed by the business, and whatever it owns belongs to the business. The business can get into debt on its own and if it fails to pay the debt – the debt is LIMITED to the business. Whoever borrowed the business money cannot take the money directly from the owners.
In addition, as the business is seen as a legal person – it means that the business gets to pay corporate taxes. And so, it pays taxes using the lower rates that are applicable to businesses (maximum 28%). If the business is small – it can qualify for taxes applicable to small businesses.
- If the business earns less than R1 million in yearly revenues, the business owner can apply for turnover tax.
- If the business earns less than R20 million in yearly revenues, the owner will pay using the small business tax rates.
If the business earns more than R20 million in yearly revenues, the business will pay tax on the normal corporate tax rate of 28%.
These businesses are also called private companies. We will talk about this in more detail below as we look into public companies.
But as the business is registered and seen as a separate individual – it is subject to the Companies tax act of 2008. The companies act is the constitution for companies. It gives companies rights and responsibilities. And so, all companies must make sure that they comply with the companies act.
It is important for business owners to be aware of what legal requirements exist for their companies, as if you fail to comply with the law – you may be held responsible for it. So, for example, above we have stated that a private company protects the owner from being held liable for the businesses’ debts. This is a right that business owners have. But the owners also have a responsibility according to the companies act. If owners are doing fraudulent business, and this leads to the company being unable to pay all its debt when it becomes due – the owners can be held personally responsible for the business’s debts. It is therefore critical that as a business owner – that you have a basic understanding of what the companies act requires of you and your business.
4. Public company
A public company carries with it the same benefits and disadvantages as the private company. A public company is seen as a separate legal entity, and it also has a lot of responsibilities that come from the Companies act. Public companies do not have the PTY, just the LTD at the end of their names.
So, why is one private while the other is public. Private companies are not allowed to get investments from the public. They can only get investment from private owners. Public companies are listed on the Johannesburg Stock Exchange (JSE) and can sell their shares to the public. For example, you can go online right now and buy Pick N Pay shares. But you can’t go online right now and buy Roots of Abundance shares.
In addition, public companies can borrow money from the public while private companies can’t. If we at Roots of Abundance wanted to borrow money, we can go to banks and other financial institutions, or even borrow money from 1 of our owners. Whereas Pick N Pay can decide to get debt from the public. Through the JSE they can request money from the public and get it legally. We will talk about the various ways they can do this in a future blog post.
As public companies can get funded from the public and have to be registered in the JSE – they also have way more legal requirements to comply with. For example, public companies HAVE to be audited by an external audit firm. But private companies do not have to be audited. Only private companies that are deemed to be of public interest are required to be audited. Basically, if your private company becomes too big to fail (i.e., employs a lot of people, makes a lot of money, etc.) than it has to be audited.
5. Franchise
You know that you can buy your own KFC? That is a franchise. KFC is an established global brand that has written down how it does business. From how it works with suppliers, to how it employs & trains staff, all the way to how it fries a drumstick, etc. With this information, they know exactly how KFC makes money, and how much of the money it makes is profit. When you buy a KFC, you are buying a brand with a proven track record.
Usually, when you buy a franchise, you must pay a franchise fee. This is a monthly amount that is either fixed (i.e., standard amount over time), or is linked to your monthly sales revenue (i.e., a percentage of revenue), or both (i.e., fixed amount + % of revenue).
The franchise fee can become a burden to owning a franchise. It adds to the cost of doing business and if the business is struggling to make sales – it can result in the business going bankrupt. But the benefit is that you have a proven brand that SHOULD work. In addition, the company selling the franchise usually provides you with support in training stuff and marketing your products/services.
Now, you can buy a franchise as a sole proprietor, a partnership, private company, or a public company. The same advantages and disadvantages mentioned above apply.
Table summary:
The table below shows the business type and gives a brief description of what the type means.
| Business Type | Description |
|---|---|
| Sole Proprietorship | A business owned and operated by a single individual. |
| Partnership | A business structure where two or more individuals share ownership and responsibilities. |
| Proprietary Limited Company | A privately held business entity with limited liability for its shareholders. |
| Public Company | A company whose shares are traded on a public stock exchange. |
| Franchise | A business arrangement in which a franchisor grants a franchisee the right to operate a business under its established brand and system. |
Conclusion:
The above was just a brief overview of the different types of business available to you. We have not discussed all the underlying issues – just the main issues that highlight differences. You can find a lot more information through a Google search which we recommend you do.
Which specific type of business holds greater appeal for you? Have you already completed the registration process for your business? Are you familiar with the legal requirements that pertain to your particular business? If you find yourself lacking clarity in any of these areas, please feel free to share your questions with us. We are eager to assist you in finding the right answers and guiding you towards the appropriate course of action.
