Starting your own business or going it alone as a freelance contractor is a big step. You need to be resilient and committed to the entrepreneurial path you’ve chosen. You also need to decide on the company structure that is best suited to the type of business you want to build. Many start-ups begin as solo ventures run by an owner-operator in what’s called a sole proprietorship – but will a 1-person operation still suit you if your business takes off and you want to scale up?

And if you do need to bring other people on board to turn your business dream into a thriving company, should they be partners or employees? Should you register a proprietary limited (Pty Ltd) company or buy a close corporation (CC)? Different types of company structure each offer their own pros and cons. Here are the main differences between 6 common business types:

Informal enterprises

1. Sole proprietorships

As a sole proprietor, also known as a sole trader, there is no separation between the business and you, the owner. You receive all the profits, but you are also liable for all debts and losses. Many sole proprietors do business under their own names because creating a separate business or trade name isn’t necessary.

Advantages

• It’s easy to establish a sole proprietorship and just as easy to end the business, because there is no regulation other than personal income tax on profits earned. This makes it a popular option among contractors and consultants.
• It can be scaled up easily and you can register a proprietary limited company as your business grows.
• Taxation and tax returns are straightforward. You’ll pay personal income tax on your business earnings.
• You’ll have no additional employee overheads.
   

Disadvantages

• A sole proprietorship provides no legal liability protection to you as the owner. Your personal assets could be seized and sold in any debt recovery claims.
• Businesses that have a proprietary limited structure or other forms of incorporation are more likely to get capital funding through banks, provided they have an established track record and a healthy balance sheet. This is more difficult for sole proprietors.
• It’s easier to grow a business with a group of people who offer complementary skills. As a sole proprietor, you may have skills in some areas of business, but also have gaps in your skillset that you’ll need to fill if you’re going to remain a solo operator. As a sole proprietor, you can get tired of constantly learning additional skills, and it may be easier to work with people who already have them.

2. Partnerships

In South Africa, a partnership is an association between 2 or more people who come together to conduct a trade, business or profession. Unlike other business structures, a partnership is not considered a distinct taxpayer. Each partner is individually taxed on their share of the partnership’s profits. You and your partners might contribute money, property, labour or skills, and you will all expect to share both the profits and losses of the partnership. There are 3 main types of partnerships:
 

• General or ordinary partnership
  You and your partners are jointly liable for the debts and profits of the partnership.
  
  
• Anonymous (sleeping) partnerships
  The anonymous partner remains unknown outside the business and to the public, is liable to you and any other partners on an agreed pro-rata basis, and will profit from the partnership in the same way.
  
  
• Commanditarian partnership
  In this arrangement, a partner is primarily a financial participant in your company, but with limited liability. They will share in your profits and losses, but only to an agreed extent.
   

Advantages

• Easy to establish and operate.
• Draws on different skills for your business.
   

Disadvantages

• Unlimited liability for partners.
• Potential challenges in decision-making and business continuity if you and your partner disagree on a business decision.

Registered businesses

3. Close corporations

A change in South African law has meant that no new CCs could be registered after 1 May 2011 – the government plans to convert all existing CCs to Pty Ltd companies in time, but no deadline has been set for this transition. In the meantime, there are plenty of CCs still in existence that were registered before May 2011, so you could find one to buy, if it’s the small-business structure you prefer. A CC has members as opposed to shareholders or directors, and a CC can register up to 10 members, whose shareholding and ownership conditions must be made clear. 
 

Advantages

• The assets and liabilities of your CC are separate from your personal assets. This means that if the business goes bankrupt, creditors can claim only assets owned by the CC and not your personal assets such as your house, unless you have signed personal surety over any debts incurred by the CC.
• Taxation begins at a set threshold for small and medium enterprises. If your CC does not meet this income threshold, it will be taxed at a lower rate – usually 28%.
   

Disadvantages

• Financial statements and tax returns must be prepared and submitted every year and signed off by the appointed accounting officer.
• If your CC grows to a certain size or number of members, it may need to be audited, which can be costly.
   

4. Pty Ltd companies

A Pty Ltd company is a common business structure in South Africa. Like a CC, it is registered as a separate legal entity from you as its owner, so it provides limited liability protection. The company must be registered as a tax-paying entity. As such, it can enter into contracts, own property and conduct business independently. It is a legal requirement that you include the terms ‘Pty Ltd’ or ‘proprietary limited’ in the company name.
 

Advantages

• You have business autonomy, and don’t need to explain business decisions to anyone else.
• Your personal assets are not at risk to cover business debts.
• Pty Ltd companies are easier to set up than larger business entities.
   

Disadvantages

• Pty Ltd companies are more complex than sole proprietorships, with additional legal, tax and financial reporting requirements.
• You have limited capital raising options, since the company is privately held by you and your other directors – shares cannot be floated for public purchase.
• Pty Ltd companies must undergo an annual financial audit.
• The balance between autonomy and legal protection for this company structure makes it a popular choice for businesses in South Africa. If you’re scaling up a sole trading business as it grows, consider a Pty Ltd company.

5. Personal liability company

This is a more unusual type of business structure, usually used for groups of professionals, such as lawyers, doctors, and accounting practices. They can cater for one or more directors.
 

Advantages

• A personal liability company is treated as a separate legal entity, separate from its owners (the shareholders).
• The shareholders’ liability is limited, and they cannot be held accountable for the debt or actions of the personal liability company.
• Owners of a personal liability company have more flexibility, as they are free to decide how they want to distribute the profits to the shareholders.
    

Disadvantages

• Both current and previous directors may be held jointly and separately liable for any debts and liabilities that occur during their time in office.
• Personal liability companies are subject to many legal requirements and regulations in line with the professions they cater for, which can make compliance difficult.
• Establishing a personal liability company is more costly and regulated than establishing a sole proprietorship or partnership.

6. Non-profit organisation

Any organisation that is not for profit and is not part of government can apply for registration, including voluntary associations and non-governmental organisations, section 21 companies and trusts. Non-profit organisations (NPOs) cannot distribute any income or property to its incorporators, members, directors, officers or any related persons, and must be used to advance the purpose for which it was created. They must have a minimum of 3 directors, and must be established for public benefit, cultural or social activities, or group interests, such as religion, sciences, education, arts, charity or recreation. 
 

Advantages

• NPOs can apply for public benefit organisation (PBO) status with the South African Revenue Service, which allows tax exemptions and tax deductions for donors.
• NPOs are recognised as separate legal entities from their members. This provides liability protection for directors and members.
• Registered NPOs can apply for government funding.
   

Disadvantages

• NPOs often struggle with limited financial resources, as their business model relies on donations and grants.
• Administrative requirements for NPOs, including tax and public sector reporting, are strict and time-consuming.
   

Consult our specialist small-business advisory team for the best advice on a structure for your business and how to grow it over time.