BG101 Selecting a Legal Entity
Taxco Business Guide
Structuring your Business
The objective of this business guide is to assist you in determining which business structure will be best suited for you and how Taxco can assist with the registration thereof.
Having made the decision to be your own boss, it is important to decide the best legal and taxation structure for your business. The most suitable structure for you will depend on your personal situation and your future plans. The decision you make will have repercussions on the way you are taxed, your exposure to creditors and other matters.
These are the common types of business structures to choose from:
This is the simplest form of business since it can be established without legal formality. Also referred to as “Trading in your own Name”. There are only a few formalities to trading this way, the most important of which is informing SARS.
You are required to keep business records in order to calculate profits each year and they will form the basis of how you pay your income tax. Any profits generated in this medium are automatically yours. The sole trader is personally responsible for all business debts and are not distinguished from the proprietor’s personal affairs, so that if there are any debts, you are legally liable to pay those debts down to your last worldly possession.
Partnership / ”Stokvel”
A partnership is similar in nature to a sole trader, but because more people are involved it is advisable to draw up a written agreement and for all partners to be aware of the terms of the partnership. Again the business and personal affairs of the partners are not legally separate. Here, a group of two or more people will come together, pool their talents, clients and business contacts so that, collectively, they can build a more successful business than they would individually. The partners will agree to share the joint profits in pre-determined percentages. A partnership agreement sets out the rules of how the partners will work together. Partners are taxed in the same way as sole traders, but only on their own share of the partnership profits. As with sole traders, the partners are legally liable to pay the debts of the business. Each partner is jointly and severally liable for the partnership debts, so that if certain partners are unable to pay their share of the partnership debts, then those debts can fall on the other partners.
A close corporation is unique to South Africa and it’s business affairs are separate from the personal affairs of the members. Members are limited to ten and could include a trust, which has natural persons as beneficiaries. A member could however, be personally liable for the debts of a close corporation under a variety of different circumstances e.g. if the close corporation trades in insolvent circumstances or does not prepare financial statements within nine months of the financial year end. An accounting officer needs to be appointed and a compulsory audit is not required. Accounting records of a close corporation must be kept in the manner prescribed by the Close Corporations Act, Act no. 69 of 1984. The close corporation generally has less statutory compliance duties than a company and is taxed in exactly the same way as a company discussed below. Close corporations can be converted to private companies.
The business affairs are separate from the personal affairs of the owners, but there are legal regulations to comply with. The appropriate structure will depend on a number of factors, including consideration of taxation implications, the legal entity, ownership and liability. This separate legal entity can trade, own assets and incur liabilities in its own right. Your ownership of the company is recognised by owning shares in that company. If you also work for the company, you are both the owner (shareholder) and an employee of that company. When a company generates profits, they are the company’s property. Should you wish to extract money from the company, you must either pay a dividend to the shareholders, or a salary as an employee. The advantage to you is that you can have a balance of these two to minimise your overall tax liability. Companies themselves pay corporation tax on their profits after paying your salary, but before your dividend distribution and a secondary tax on the dividend amount declared. Effective tax planning requires profits, salary and dividends to be considered together.
There are many advantages as well as disadvantages to operating through a company and obtaining professional advice is therefore essential. Onerous responsibilities are placed on directors and managers to protect shareholders, which is discussed in a separate Business Guide.
New companies can be purchased relatively cheaply in a ready-made form usually referred to as “off the shelf" companies. There are additional administrative factors in running a company, such as statutory financial statement preparation, company secretarial obligations and audit or review procedures. A big advantage of owning a company is that your personal liability is generally limited to the nominal share capital you have invested.
Inter-Vivos Business Trust
Trusts should comply with the requirements of the Trust Property Control Act, Act no. 57 of 1988. There are no prescribed forms or statutory formalities that have to be complied with in order to form a trust, merely an oral or written agreement. An agreement can and should however be drawn up. The written agreement would become the trust instrument (by law) and is called a trust deed. In brief, the founder and the trustees must enter into a valid trust agreement whereby the founder undertakes to transfer assets to the control of the trustees, and the trustees undertake to administer the trust assets for the benefit of the trust beneficiaries, and whereby they agree to abide by the terms of the trust deed. The trustees are governed by the trust deed which must be lodged with the Master of the Supreme Court.
The trustees must obtain authority to act as trustees from the Master of the High Court by submitting a copy of the trust deed together with affixed revenue stamps. The trust deed will usually stipulate that an auditor must be appointed. The trust deed may also provide for the appointment of an accountant (accounting officer) and the duties of the accountant/auditor so appointed should be determined by the trust deed. The income retained in a trust is taxed at the maximum tax rate of individuals and the assets and liabilities of a trust is separate from the estates of trustees and beneficiaries, depending on the trust deed. Growth assets are generally placed in trust’s as part of estate duty tax planning.
A co-operative is a mutual organisation owned by its employees or members. These structures need specialist advice.
How can Taxco help?
The most appropriate structure will depend on a number of factors including consideration of taxation implications, the sources of finance, other legal entities involved, ownership and liability to creditors.
Being spoilt for choice is one thing, but making the correct choices from the beginning that suits your personal and specific business needs is essential and can impact on the eventual success of your business. The taxation laws for individuals, companies and trusts are vastly different and our professionals can help you make an informed decision and register the business structure or combination thereof that will suit your specific needs and circumstances.
For more details, Contact Us now to discuss how we can assist you to make an informed decision and possibly save a lot of money by avoiding the common pitfalls when starting a business.
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