South Africa sole proprietorship vs close corporation

South Africa sole proprietorship vs close corporation
South Africa sole proprietorship vs close corporation

Often business people have to make a decision between a close corporation and a sole proprietorship.

There are many advantages and disadvantages to both of these structures.

Whether you wish to set up a sole proprietorship or a close corporation, or need some guidance on the best company formation for you, our business experts will be delighted to help.

The table below takes you through the main points of each business structure, but please bear in mind the following:

  • The choice of a sole proprietorship or a close corporation is only applicable to those who are seeking an endorsement to a spousal or life partner permit;
  • Close corporations are now longer available as new entities, but there may be a few shelf companies still that can be purchased or you may be buying a business that is a close corporation;
  • Those opening a business on a business permit will more than likely have to establish a Pty Ltd.

Comparison – Sole Proprietorship versus Close Corporation

Factors Sole Proprietorships Close Corporations
  • Characteristics
  • Owned and managed by an individual
  • No legal requirements for registration except for ensuring that owner is registered for income tax purposes
  • Type of business traditionally used for managing shop, consulting, hairdressers, taverns, and similar small business
  • Subject to Close Corporations Act 1984
  • Has characteristics of both partnerships and companies
  • Established by way of a founding statement containing details of members, proposed name, interests of members
  • The name must end with cc
  • Legal persona
  • It does not have a legal personality
  • There is no existence of the business without the owner
  • All assets and income belong to the owner in his personal capacity
  • He is taxed in his personal capacity
  • It is a separate entity that exists separately from its members
  • Membership must be expressed as a percentage and total 100%
  • Members both own and control the business
  • Usually two or more members have to sign legal documentation
  • Each member makes a contribution when he joins and it does not have to be equal to other contributions
  • Liability
  • The owner is liable for all debts and claims against the business
  • CC is a legal person so members are not liable in their personal capacity
  • Members are held jointly and severally liable in specific instances
  • Exceptions to personal exemption: abuse of powers, fraud, etc
  • Profit taxed as company tax and not in the hands of the member
  • Control and authority
  • The owner has direct control over all decisions
  • All profits go to the owner
  • Free to make all decisions and changes
  • Business demands high level of commitment from owner in terms of time and his or her resources
  • Fiduciary duties (in good faith)
  • Each member has authority to bind corporation to transactions
  • Capital acquisition potential
  • Limited to the owner’s personal and financial credit rating
  • Expansion is limited because of the limited availability of funds
  • Exposure to excessive loan capital can result in the owner having to forfeit control, authority and freedom
  • Transfer of Ownership / Lifespan and continuity
  • Owner can decide at any time to sell, close down to transfer to someone else
  • The lifespan of the business is usually linked to the owner’s capacity
  • If the owner dies or becomes insolvent, or otherwise legally incapable, this usually means the end of the business
  • Not influenced by the withdrawal of members
  • Can be transferred to individual if all members agree
  • Can be terminated in a Court of Law
  • Legal prescriptions
  • None
  • These are not strict and registration costs are low
  • Does not need an auditor but does need an accounting officer
  • Financial statements must be drawn up within 9 months of the year-end and approved by all the members

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