As a business owner or entrepreneur it is essential that you decide the type of business structure for your business. Below are some of the common types of business ownership structures in South Africa along with their advantages and disadvantages to choose from.
The simplest business ownership structure in South Africa is a sole proprietorship or a sole trader. As a sole trader you can operate your business on your own, control all the business operations and enjoy all the profits. However, as a sole trader you are personally liable for all the debts and taxes your business may incur. A sole trader can still employ other people to assist but you still maintain control of how your business operates. Some examples of sole traders include Spaza shop owners, general dealers and hairdressers. Normally sole traders are normally small operations that do not cash in a lot of income.
Some of the Advantages of Operating as a sole trader are;
- This type of business ownership is fairly easy to set up and run
- You have complete control of your assets and how your business runs
- A sole trader has fewer reporting requirements compared to other business structures
- The losses you may incur can be offset by other income such as your investments or wages
- Changing the legal structure of your business is easy
Some of the drawbacks of a Sole trader are;
- A sole trader has unlimited liability, that is all your personal assets can be taken away to pay off debts
- Raising capital for a sole proprietorship can be difficult when you are alone
Another type of business ownership in South Africa is a partnership. A partnership is the coming together of two to twenty people who contractually agree to form a profit generating enterprise. Based on the partnership terms and conditions each partner can be given certain responsibilities and shares within the business. Also, the profit and loss sharing are agreed upon inception. It is important to note that each partner shares debt that the business may occur based on their profit-sharing ratios. Some of the advantages of setting up this types of business ownership in South Africa are;
- It is relatively cheap to set up and operate
- Raising funds for a partnership is not that difficult since all the partners can contribute towards the capital
- If more than one person is involved in running the business they can each bring their unique skills and experience to the business
- The reporting requirements for a partnership are not that difficult compared to other business structures
- The sharing of management and staffing responsibilities helps run the partnership efficiently.
Some of the disadvantages of partnerships are;
- The possibility of disputes
- Changing the ownership of a partnership can be difficult and requires a new partnership to be formed
Private Company (Pty) Ltd
A private limited company is the third types of business ownership in South Africa. This type of business ownership exists and operates as a separate legal entity. A private limited company is separate from its shareholders and this means that it is responsible in its own rights. The finances of a private company are separate from the director’s personal finances. That is, any profit obtained from the company belongs to the company. Also, this type of business needs to be registered at the Companies and Intellectual Property Commission (CIPC). A private company can be a complex business structure with high set up costs and administrative costs due to its additional reporting requirements. Some of the advantages of a Private Company are;
- The owners/directors can enjoy limited liability.
- Since a partnership can have more than 20 people. Raising capita for the business is not that difficult
- Selling and passing ownership is easy
- You can access loans and credit facilities easily with a partnership and are eligible to qualify for tenders
Some of the drawbacks of a partnership are;
- Setting up a private limited company can be costly
- The owners/directors of the company have limited control of the company affairs
- This type of business ownership structure requires complex reporting requirements
- The company cannot distribute its losses to shareholders
Also one of the many types of business ownerships structures in South Africa is the a public company. This types of business can issue shares on the security’s/stock exchange to raise capital. Public companies are called public because anyone can buy their shares and own a stake of the company. At inception a public company issues securities through an Initial public offering (IPO). Afterwards the stocks of the public company can be traded on at least one stock exchange. Also, the daily trading of the public company’s stock determine the company’s value. Some of the advantages of Public companies are;
- Raising capital is very easy
- Fund managers, traders and anyone interested can monitor a public company because they are listed on the stock exchange
- The risk of the public company is spread among its various shareholders
- Anyone can easily sell their shares to the public
Some of the drawbacks of public companies include;
- The costs associated with setting up and running a public company are high than most types of business ownership
- Decision making tends to be longer since there are more shareholders and directors
- There is limited privacy when it comes to public companies since a public company is required to publish its financial performance for the public
The last type of business ownership on our list is a Franchise. A franchise is an already established company that has a successful track record that allows other companies to operate under its brand name. In return the company gets a certain royalty or payment for the use of its brand. There are many franchises operating in South Africa and some of them include fast food outlets such as KFC, McDonald’s and Nando’s. Franchises offer training to anyone interested in using their brand in order to maintain the image and quality of the brands products or services.
Some of the advantages of a franchise business are;
- Ongoing training and support to optimise your business operations
- A reputable and established brand that is already accepted by the market
- Ongoing operational support
Some of the drawbacks of a franchise business include;
- Lack of freedom to run your business since you have to follow strict procedures and regulations
- High set up costs
- Paying royalties for the use of the franchise name.