Before you start your venture, it is crucial to have a clear understanding of the different business entities and structures. Photo: Freepik
Before you start your venture, it is crucial to have a clear understanding of the different business entities and structures. Photo: Freepik

5 types of business structures you need to know about before starting your company

By Xolile Mtembu Time of article published Jan 6, 2022

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Before you start your venture, it is crucial to have a clear understanding of the different business entities and structures. Informing yourself before you embark on your business journey will prevent you from encountering the pitfalls that many first-time entrepreneurs come across.

Here are the different company structures:

1. Sole Proprietor/Trader

This is a type of business that is founded and run by a single individual. As a sole proprietor, you have full authority over the decisions, plans, and strategies of the start-up. You would also be entitled to all the profits generated.

According to SME SA, the advantage of a sole proprietorship is that it is easier to set up than other businesses, and as an owner, you have 100 percent ownership and control of the business.

Conversely, as the owner, you assume all the risk. If you want to include other people in the business, you must dissolve your existing proprietorship and start over and form a new business. In the case of business debt, your assets can be seized, and you are solely liable for any obligations.

2. Partnership

Multiple owners create and operate the business together. Capital towards the business is contributed by all the individuals, and the workload is shared, depending on each person’s sets of skills.

Partnerships have the advantage of having more knowledge or expertise to source from. The owners will also have more capital to access and use. There is more distribution of labour and assistance in times of uncertainty.

Disadvantages to such a business include having to share control with your partners, disagreements that may halt work and impact revenue, and strain if a single owner decides to sell while the other partners do not want to.

3. Pty Ltd - Proprietary limited company

The owners of a Pty Ltd are called shareholders. This type of business is handled as a separate legal entity, meaning the company or organisation has legal rights and obligations.

Because the company is a separate entity, it can continue to thrive even if shareholders bring new people on board. Any fraudulent or risky actions are only liable to the individual who commits them.

However, the disadvantages include needing more money to register such an entity, having to comply with legal requirements, and not participating in the stock exchange because it is a private company.

4. Closed Corporation (CC)

According to SME SA, existing CCs will remain in place, but no further registration of CCs may take place. However, it is also possible to now convert a CC to a company.

5. Public Company

This company must have at least three directors. Only such companies are listed on the Johannesburg Stock Exchange (JSE).

The Companies Intellectual Property Commission (CIPC) says such a company must be audited and produce financial statements which are tabled with their shareholders annually, and depending on the size of the public company, it may also be required to have an Audit Committee and a Social and Ethics Committee.

The advantages of a public company include being able to sell shares to the public, resulting in more capital and having the risks of a business spread across shareholders.

The challenges that directors or shareholders may come across can be that because of the various people on board, it can take longer to make decisions. Documents need to be published publicly and can be viewed and dissected annually.

BUSINESS REPORT ONLINE

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