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
