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Choose the right legal entity

Choose the right legal entity

Episode 1:-

It seems as though 2016 has a rough ride in store for us but as the wise old saying has it: “Fortune favours the brave”.  Just remember to mix a good dose of realism in with the bravery.

That said, if you’ve been sitting on a brilliant business idea, and if you’ve ever dreamt of leaving your 9 to 5 job and starting up on your own, this could well be your year! 

Get going with these 3 steps –

  1. Consider checking first that you are suited to the excitement, rewards, risk and rough-and-tumble of entrepreneurship by taking the “Entrepreneurial Personality Profile” test on the Psychology Today website at http://psychologytoday.tests.psychtests.com/take_test.php?idRegTest=3204.
  2. Passed the test?  Great, next step is to get off on the right foot with “Starting a business: Ten simple rules for a successful start-up” on the Business Partners website at http://www.businesspartners.co.za/starting-a-business/.  (Tip:  Don’t ever lose sight of Rule 10 “Enjoy Yourself”!)
  3. All done?  Stage 3 is to choose the right trading vehicle to suit your particular needs and those of your new business.  This is important – starting off with one legal entity and then later moving the business to another type risks all sorts of unhappy legal and tax issues (quite apart from all the obvious practical ones, like wading through piles of red tape at SARS, Telkom and your bank’s “please hold, your call is important to us” call centre).

Choose the right legal entity!

In South Africa you have these four main options to choose from –

  1. A sole proprietorship (“sole trader”).  Only one owner – you are the business. [link]
  2. A partnership of 2 to 20 owners. [link]
  3. A private company (“Pty Ltd”) for any number of owners (“shareholders”).  Note that CCs (close corporations) still exist, but no new ones are registered.
  4. A business trust (also any number of owners).

There are other specialised types of company available only to non-profit organisations (charities and the like), and to professionals (lawyers, accountants, doctors etc) and various ways in which different legal entities can be combined, but to start with let’s stick with the four basic options above.

In future articles we’ll look in detail at each of these four options but, and this is vital, don’t make any decisions without first seeking professional advice on the legal and tax implications of using each type of entity.  There are a lot of minefields here!

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