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Steering your enterprise in the right direction

Monday, February 18, 2019

Choosing your business model is an important long-term decision. Your business model is the foundation on which your business grows and adapts to market changes. So, giving it some serious consideration upfront will make things easier down the line.

There’s a lot to think about, with a range of factors to consider. Which models include the most personal risk? What are the tax implications of your chosen model? Will you be regulated by complicated legislation, and will your choice of business model make it difficult to get funding?

Think about these issues carefully during the beginning stages of your business; it’ll prevent difficult and expensive changes later on.

Your options:

  • Sole Proprietorship
  • Partnership
  • Co-operative
  • Closed Corporation
  • Private Company
  • Business Trust
  • Incorporated Professional Practice
  • Combinations of legal entities

These apply to different types of businesses, and the choice between them is usually determined by the nature of the venture and by its short- to medium-term business plan.
Consider these factors before registering your business:

Personal liability:You can either run the business in your own name or you can run it out of a corporate vehicle that has a separate legal personality. By choosing the latter option, you can protect yourself from the creditors of the business, who will be able to recover debts from the assets of the business, but not from your own personal assets. You shouldn’t underestimate the importance of planning for business failure and of protecting your existing personal assets.

Business Continuity: What will happen to your business at your death – will it keep running or have to be sold? The various legal entities have different processes. For example, a partnership dissolves on the death of one of the partners.
Financing: Business types are regulated differently and perceived differently in the market. For example, a private company is often viewed as more stable and established than a sole proprietorship. The choice of a business model may also determine funding options. For example, a company can raise funds by issuing shares but a sole proprietorship may only raise finance from a loan.

Administration costs: The financial and administrative cost of compliance differs depending on your choice of business. You need to assess these costs against the benefits of the business model concerned.

What happens if you decide to sell? The format of your business also affects the options that will be open to you if you decide to sell. How easy will it be to transfer ownership? Will you be able to sell part of the ownership of the business, or only the business as a whole? What are the legal impacts of a change of ownership in the business? Every business type deals with these issues differently.

Tax considerations: Different business entities are taxed differently. This is an important factor that requires careful consideration. Examples of tax implications include:

  • Small Business Corporations (SBCS): A Small Business Corporation is the name that the Income Tax Act gives to certain types of businesses that meet the criteria for tax breaks granted to small businesses. 
  • Micro Businesses: A “Micro Business” is the name given to small businesses that have an annual turnover of less than R1 million and which can therefore choose to pay “Turnover Tax”, instead of ordinary business taxes.

We hope we’ve made it easier for you to choose the best business type for you. If you’d like more comprehensive advice (including written advice packages covering the advantages and disadvantage of the various options in detail), speak to one of our qualified attorneys on 0860 83 84 85 as part of the Dialdirect Biz benefit included in your business insurance policy.