Once you have decided to start a business you need to decide what type of legal entity to use. An important element in your consideration will be the tax consequences of each type of entity. We discuss the various types of entities and tax implications thereon below.

1. Sole Proprietorship

The simplest form, a sole proprietorship is a business that is owned by one person. The business has no existence apart from the owner (the proprietor). Only the proprietor has decision making authority, and assumes the risks of the business to the extent of all his or her assets whether used in the business or personally owned.

Advantages:

	The business is simple to organise
	The owner is free to make decisions
	The business has few legal requirements
	The owner receives all the profits
	The business is easy to discontinue

Disadvantages:

	Unlimited liability for the owner - the owner is legally liable for all debts of the business, so any personal and real property may be attached by creditors
	Limited ability to raise capital - which in turn limits the expansion of a business when new capital is needed
	Limited skills - although the owner can hire employees with other skills

2. Partnerships

A partnership is the relationship between two or more people who join together in business. Each person contributes money, property, labour or skills, and in turn each shares the profits and losses of the business. The number of people who may join a partnership is limited to twenty.

Advantages:

	It is easy to organise
	It has greater financial strength
	Managerial skills of the partners are combined
	It has a definite legal status
	Each partner has a personal interest in the business

Disadvantages:

	Unlimited liability of the partners - therefore one partner can cause the loss of assets of the partnership as well as the personal assets of the remaining partners
	The authority for decisions is divided

3. Close Corporation

A close corporation is a legal entity with its own legal personality and perpetual succession. The owners are the members, who do not hold shares but have an interest in the cc, which is expressed as a percentage. The maximum number of members is ten.

Advantages:

	It is simple to organise
	The life of the business is perpetual (i.e. continues after members die)
	The members have limited liability
	The transfer of ownership is easy
	Fewer legal requirements than a private company

Disadvantages:

	It is subject to special taxation rates
	The maximum number of members is restricted to ten
	More legal requirements than a sole proprietorship or partnership

4. Private Company

A company is treated by law as a single legal entity, separate from its owners with rights and duties of its own. The owners are shareholders, and the managers may or may not be shareholders. The maximum number of shareholders is limited to fifty.

Advantages:

	The life of the business is perpetual
	The shareholders have limited liability
	The transfer of ownership is easy
	It is easier to raise capital and expand
	Efficiency of management is maintained
	It is adaptable to both small and large business

Disadvantages:

	Is it subject to special taxation rates
	It is more difficult and expensive to organise than other forms of ownership
	It is subject to many legal requirements

Summary of Advantages and Disadvantages of the four types of business organisations:

ADVANTAGES:

DISADVANTAGES:

Comparative tax structures of each of the four forms of business organisation

In order to understand the tax consequences of each of the four business organisations, you need to understand the basic steps for determining your business' profit or loss (see the article, Record Keeping).

Registering with the appropriate authorities

Before you actually start your business, you may need to register with certain authorities in order to comply with the laws or regulations pertaining to your area of operation. It will be in your own interest to make enquiries in this regard and to comply with all the requirements that might be set. Some of the requirements that might apply to you are mentioned below, however the list is not comprehensive and it is advisable for you to consult a lawyer.

Receiver of Revenue - you may have to register for one or more of the following:

	Income Tax: as soon as you start business, you need to register with your local Receiver of Revenue in order to obtain an income tax reference number.
	Employees Tax (PAYE): a system of Employees Tax collection is in force in South Africa. You need to therefore deduct tax from your employees' salaries or wages and pay this over to your local Receiver of Revenue.
	Value-Added Tax (VAT): VAT is a tax that must be included in the price of every taxable supply. When your taxable supplies exceed or are likely to exceed R150 000 per annum, you are obliged to register for VAT at your local Receiver of Revenue.
	Unemployment Insurance Fund (U.I.F.): this fund provides for the insurance of employees against the risk of loss of earnings arising from unemployment. An employee is required within 14 days of starting to submit to the Unemployment Insurance Fund a notification form U.I.F. which can be obtained from the fund on application. This fund is administered by the Department of Manpower, and all correspondence must be addressed accordingly.
	Regional Services Council (R.S.C.): these are statutory autonomous bodies, similar to local authorities, and have been established to render services on a regional basis. Any person within the region who employs people or owns a business must register with the R.S.C. Enquiries in this regard must be directed to your local regional authority.
	Other authorities who you may need to register with are:
	o Local licensing authorities o Health authorities o Customs and excise authorities

Information supplied by the South African Revenue Services, compiled by Bizland

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