ADVANTAGES OF FORM OF BUSINESS ENTITIES
SOLE PROPRIETOR
Advantages…Sole Proprietor Disadvantages…Sole Proprietor
There are no formal requirements for
the creation or running of the business.
The sole proprietorship is not a separate
legal entity and the business owner is
therefore responsible for all debts in the
business. His/ her personal assets can be
attached for debt.
All the profits accrue to the sole
proprietor.
The full value of the business forms part
of the sole proprietorship estate in the
event of death. This could lead to estate
duty being paid.
There are no restrictions on the capital
employed in the business.
The business needs to be shut down on
the sole proprietors death, there is no
automatic continuation of the business
on death. Special provision can be made
via the will though.
Capital gains inclusion rates are lower
for individuals than for business
entities. The sole proprietor also enjoys
the normal tax rebates and the annual
capital gains exclusion.
The sole proprietor can run the business
as he sees fit, he has full control over
the business.
The termination of a sole proprietorship
is far simpler than in other cases.
Simply ensure that obligations are met
and cease to do business.
PARTNERSHIPS
Advantages…Partnerships Disadvantages…Partnerships
There are no formal requirements for
the creation of a partnership.
Not a separate legal entity and therefore
partners are liable for the partnership
debts in their own capacity. The
personal, individual assets of the partner
may be attached for the liabilities of the
partnership under certain circumstances.
There are no formal requirements for
the running of the business. This makes
partnerships an inexpensive business
entity to run.
The partnership terminates on the death
of a partner. Unless there are sufficient
funds available to buy the deceased
partner’s share or to pay his share in
cash, the assets of the partnership will
have to be sold.
Partners are taxed in their own
capacities, which could lead to lower
taxation, depending on the level of
income of the individual.
A partner may not be a member of a
pension/ provident fund , as there is no
employee/employer relationship
between the partnership and its partners.
CLOSE CORPORATIONS
Advantages…Close Corporation Disadvantages…Close Corporation
Is a separate legal entity and is therefore
not affected by the death of a member.
Under certain circumstances, the
members can be held personally liable for
the debts of the close corporation.
The members are only liable for debts of
the corporation under a number of
specified circumstances.
All the members have to give their
consent for the disposal of a member’s
interest and they have to be given
preference to third parties to acquire the
interest.
Registration of a close corporation is
relatively simple and inexpensive when
compared to a company.
A close corporation may only have 10
members and only natural persons and
trustees of testamentary trusts may be
members. This also has the effect that a
close corporation cannot become part of a
group of business entities, except as the
top holding entity.
Members will not pay tax on all the
profits of the close corporation as is the
case with a partnership. The close
corporation will pay tax at a flat rate,
whereafter the profits can be distributed
to the members as a tax-exempt
dividend, but subject to a withholding
tax of 10% in the hands of the close
corporation.
An inter vivos trust cannot hold the
interest in a close corporation.
The Act is not very prescriptive as far as
meetings and procedures are concerned.
The running of a close corporation is
much simpler than that of a company.
An audit is not required for a close
corporation.
The inclusion rate for Capital Gains Tax
is higher than for individuals. Close
corporations do not qualify for the
primary abatement applicable to
individuals.
A close corporation may acquire the
interest of a member, or it may assist
members financially to acquire the
interest of a member.
COMPANIES
Advantages…Companies Disadvantages…Companies
Shareholders cannot be held liable for the
liabilities of the company, as the
company is a separate legal entity.
An annual audit must be performed.
Private company can have up to 50
shareholders. Public company unlimited.
Constant rate of tax, regardless of the
income level.
Shares in a company are easily
transferable.
Subject to capital gains tax and the
inclusion rate is higher than for
individuals.
A trust can own shares in a company.
INCORPORATED PRACTICES
The Companies Act makes provision for the incorporation of companies where the directors accept
personal liability for the companies liabilities.
Advantages...Incorporated Practice Disadvantages…Incorporated Practice
The tax rate for companies (28%) is
lower than the maximum tax rate for
individuals. Qualifying small businesses
may even pay less tax.
An incorporated practice is more
expensive than a partnership to run.
The company structure offers continuity
in the event of a shareholder’s death. Not
so in a partnership.
There is an employer/employee
relationship between the company and
its employees.This means that pension
and provident funds may be established.
The company structure will allow the
increase in shareholders to 50, rather
than the 20 in a partnership.
Structure that many professionals make
use of.
Advantages…Sole Proprietor Disadvantages…Sole Proprietor
There are no formal requirements for
the creation or running of the business.
The sole proprietorship is not a separate
legal entity and the business owner is
therefore responsible for all debts in the
business. His/ her personal assets can be
attached for debt.
All the profits accrue to the sole
proprietor.
The full value of the business forms part
of the sole proprietorship estate in the
event of death. This could lead to estate
duty being paid.
There are no restrictions on the capital
employed in the business.
The business needs to be shut down on
the sole proprietors death, there is no
automatic continuation of the business
on death. Special provision can be made
via the will though.
Capital gains inclusion rates are lower
for individuals than for business
entities. The sole proprietor also enjoys
the normal tax rebates and the annual
capital gains exclusion.
The sole proprietor can run the business
as he sees fit, he has full control over
the business.
The termination of a sole proprietorship
is far simpler than in other cases.
Simply ensure that obligations are met
and cease to do business.
PARTNERSHIPS
Advantages…Partnerships Disadvantages…Partnerships
There are no formal requirements for
the creation of a partnership.
Not a separate legal entity and therefore
partners are liable for the partnership
debts in their own capacity. The
personal, individual assets of the partner
may be attached for the liabilities of the
partnership under certain circumstances.
There are no formal requirements for
the running of the business. This makes
partnerships an inexpensive business
entity to run.
The partnership terminates on the death
of a partner. Unless there are sufficient
funds available to buy the deceased
partner’s share or to pay his share in
cash, the assets of the partnership will
have to be sold.
Partners are taxed in their own
capacities, which could lead to lower
taxation, depending on the level of
income of the individual.
A partner may not be a member of a
pension/ provident fund , as there is no
employee/employer relationship
between the partnership and its partners.
CLOSE CORPORATIONS
Advantages…Close Corporation Disadvantages…Close Corporation
Is a separate legal entity and is therefore
not affected by the death of a member.
Under certain circumstances, the
members can be held personally liable for
the debts of the close corporation.
The members are only liable for debts of
the corporation under a number of
specified circumstances.
All the members have to give their
consent for the disposal of a member’s
interest and they have to be given
preference to third parties to acquire the
interest.
Registration of a close corporation is
relatively simple and inexpensive when
compared to a company.
A close corporation may only have 10
members and only natural persons and
trustees of testamentary trusts may be
members. This also has the effect that a
close corporation cannot become part of a
group of business entities, except as the
top holding entity.
Members will not pay tax on all the
profits of the close corporation as is the
case with a partnership. The close
corporation will pay tax at a flat rate,
whereafter the profits can be distributed
to the members as a tax-exempt
dividend, but subject to a withholding
tax of 10% in the hands of the close
corporation.
An inter vivos trust cannot hold the
interest in a close corporation.
The Act is not very prescriptive as far as
meetings and procedures are concerned.
The running of a close corporation is
much simpler than that of a company.
An audit is not required for a close
corporation.
The inclusion rate for Capital Gains Tax
is higher than for individuals. Close
corporations do not qualify for the
primary abatement applicable to
individuals.
A close corporation may acquire the
interest of a member, or it may assist
members financially to acquire the
interest of a member.
COMPANIES
Advantages…Companies Disadvantages…Companies
Shareholders cannot be held liable for the
liabilities of the company, as the
company is a separate legal entity.
An annual audit must be performed.
Private company can have up to 50
shareholders. Public company unlimited.
Constant rate of tax, regardless of the
income level.
Shares in a company are easily
transferable.
Subject to capital gains tax and the
inclusion rate is higher than for
individuals.
A trust can own shares in a company.
INCORPORATED PRACTICES
The Companies Act makes provision for the incorporation of companies where the directors accept
personal liability for the companies liabilities.
Advantages...Incorporated Practice Disadvantages…Incorporated Practice
The tax rate for companies (28%) is
lower than the maximum tax rate for
individuals. Qualifying small businesses
may even pay less tax.
An incorporated practice is more
expensive than a partnership to run.
The company structure offers continuity
in the event of a shareholder’s death. Not
so in a partnership.
There is an employer/employee
relationship between the company and
its employees.This means that pension
and provident funds may be established.
The company structure will allow the
increase in shareholders to 50, rather
than the 20 in a partnership.
Structure that many professionals make
use of.
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