Starting a business – Types of businesses

When it comes to starting a business, there are four different ways of starting a business. The law says what you must do for each way. For example, whether you must register the business, how you must register it and so on.

If you want to start a business, you must decide whether you want your business to be:

• a sole trader or sole proprietor
• a partnership
• a close corporation
• a company

Sole trader or sole proprietor

A sole trader or a sole proprietorship means one person owns the business. (Proprietor means owner). For example, Vusi wants to start a business repairing shoes. He runs this business from his home or from a shop. A sole trader does not have to register the business.

If you are a sole trader, the law does not make a difference between the things that belong to you and the things that belong to your business, which are called assets. What does this mean? It means that the tools which Vusi uses to repair shoes, the table on which he works and the cash register belong to him in the same way that his television set or his bed belongs to him.

There is also no difference between the money you owe people and the money your business owes people, which are called debts. For example, the money Vusi must pay for using electricity is considered no different to the money he must pay the man from whom he buys his leather to repair shoes.

The following example shows why this is important: Vusi buys leather from a supplier to repair shoes. He does not pay the supplier for six months, so the supplier decides to go to court to get his money. If Vusi does not have the money to pay the supplier, the court can take away his tools, his tv, his car, or anything that is a luxury, and sell it to pay the supplier. Also, if Vusi does not pay his water and electricity accounts, or an instalment for the new cupboard he bought, the Sheriff of the Court could take the tools he uses for repairing shoes and sell these to pay his personal debts.

If a sole proprietor wants to give the business a name, like Cool Leather, she or he can do that. When a sole proprietor fills in any form or signs contracts or opens a bank account, he or she must write their own name and then write ‘trading as’ (or ‘t/a’ for short) and then write down the name of the business.

For example, Lena Jacobs is a sole proprietor. She runs a grocery shop from her house. She calls it KwikSave. She must fill in all forms for her business like this: Lena Jacobs t/a KwikSave.

Partnership

A partnership is a business that has between 2 and 20 partners. The partners own the business together.

If two or more people want to start a partnership, they should sign a written agreement. A lawyer should prepare this. The agreement must include these points:

• what happens to the assets of the business, for example, the tools and the furniture, if the partnership ends
• how the partners will share the profits

(For example, one partner works every day and another partner only works three days a week. They would not want to share the profits equally because the one partner has worked more days than the other).

• what happens if one of the partners wants to leave the partnership

Every time a new partner joins, the partners must sign a new agreement.

People can write their own contracts for the partnership, but they must make sure that it is a valid contract.

See CONSUMER LAW, What are the requirements for a contract?

Like a sole trader, the law does not recognise a difference between the partnership’s assets and debts and the assets and debts of the partners themselves. Not only that, but the law does not recognise a difference between different partners’ assets and debts.

For example Nomonde’s partner Vuyani builds a house and does not pay the builder. The builder takes him to court to get his money. The court can take the tools and furniture of the partnership and sell them to give the builder his money. The court can do this because there is no difference between Vuyani’s assets and debts and the assets and debts of the partnership. So Vuyani’s debts are also the debts of the partnership. If Vuyani cannot pay the builder, the builder can get his money from the partnership. Nomonde would be able to go to court to get the money back from Vuyani, but it is expensive to pay lawyers to take a case to court and it takes a long time before the court will hear her case.

If a partnership want to give their business a name, like Cool Leather, they can do that. When partners fill in any form or sign contracts or open a bank account, they must write their own names and then write ‘trading as’ (or ‘t/a’ for short) and then write down the name of the business.

Close corporation

A close corporation is like a company, only less expensive and less complicated to run. The Close Corporations Act introduced it in 1984.

You can go to a lawyers or an accountant and ask them to register your business as a close corporation or, as it is often called, a CC.

The people who own and manage the close corporation are called members. There are no directors or shareholders or a chairperson of the board, like a company has. A close corporation cannot have more than 10 members.

The law sees a close corporation as separate from its members. This means that unlike a sole trader and a partnership, the assets and debts of the business belong to the close corporation, and the assets and debts of the members have nothing to do with the CC.

For example, a Cool Leathers CC buys leather from a supplier to repair shoes. The CC does not pay the supplier for six months. The supplier decides to go to court to get his money from the CC. If Cool Leathers does not have the money to pay the supplier, the court can only take the things that belong to the business, Cool Leathers, to pay the debt. The court cannot take the private things that belong to Ben and Linda, who are the members of Cool Leathers.

Signing surety: Suppliers are scared that a CC may have no money to pay. Therefore suppliers often make sure that somebody signs surety for the CC, which means that if the CC does not have the money to pay, the person who has signed the surety (usually a member) will have to pay (be liable for) the debt.

Members of a close corporation must always write CC behind the name of the close corporation. For example Cool Leathers CC. If members do not put CC behind the name whenever they write it, then the law does not see the CC as separate from its members and the debts and assets of the CC are not separate from the debts and assets of the members.

If the business is a CC and the business has a letterhead, the registration number of the CC and the full names of the members must be printed on the letterhead. The number will look something like this: CK2002/031666/23.

If the business has an office, then the owner must have a sign up showing the business is a CC. For example, if Anna has a dry cleaning business, then she must have a sign up saying “NANUCCI DRY-CLEANING CC’.

Company

Companies have to obey all the rules of the Companies Act, which is a long and complicated law.

If more than 10 people want to start a business together, they cannot form a CC. They will have to go to a lawyer to form a partnership or a company.

A company has shareholders and directors. Shareholders can be people or other companies. Shareholders put the money into the business and are the owners of the business. Directors are the managers of the business. Sometimes the owners and the managers are the same people and sometimes they are different people.

The law sees a company as separate from its shareholders and directors. This means that like a CC, the assets and debts of the business belong to the company and the assets and debts of the shareholders and directors have nothing to do with the Company.

Suppliers or banks, which lend money to companies will often ask the shareholders or the directors to sign surety for the company. If the company cannot pay its debts, then the people who have signed surety will have to pay the company’s debts.

Directors and shareholders must always write Pty (Ltd) behind the name of the company. If they write the name of the company without writing Pty (Ltd) behind it, the law does not see the company as separate from its shareholders, and the debts and assets of the company are not separate from the debts and assets of the shareholders.

If the business is a company and the company has a letterhead, the registration number of the company and all the names of the directors must be printed at the bottom of the letterhead.

For more information on advantages, disadvantages and differences between these four types of business plans, please click here.