There are pros and cons to incorporating your business – but mostly pros
Entrepreneurs often start out as sole proprietors – or partners if there is more than one person involved in the business. It’s a natural progression, as the business grows, to incorporate. However, there is no reason to see incorporation only in the context of growth. You can set up a business as a proprietary limited company (Pty Ltd.) before you turn over your first rand. There are many good reasons to incorporate. There are a few disadvantages, but they are outweighed by the advantages. This article will cover both.
How to register a business in South Africa
Before we discuss the pros and cons, let’s first look at the process of incorporation in South Africa. Your business must be registered with the Companies and Intellectual Property Commission (CIPC), and there are several ways to do this. You can register a company following the instructions on the CIPC website, or use bizportal.gov.za, a digital platform set up by CIPC for company registration and other services. You can also register your business via your bank. Alternatively, you can outsource the whole process to an agency whose purpose is to manage company registration, B-BBEE certifications, tax clearance, and all the other activities involved in setting up a business.
If you do it yourself, it can cost as little as R125 (this does not include reserving a name or having a customised memorandum of incorporation (MOI). Using a consultant can cost more than R9000, depending on the level of service you require. There are various packages of services between those two extremes.
Benefits of incorporating your business
When you register a business with the CIPC and become a Pty Ltd., you effectively create a separate legal entity. You may be the main or only shareholder, but the company exists independently of your personal affairs. By contrast, if you are a sole proprietor, your business finances and your personal finances are inextricably linked.
This division between business and personal finances is a key benefit of incorporating a business. This protects your personal assets from creditors, should the business fail. Creditors cannot insist that you sell your home to pay them what is owed. This is known as “limited liability”; in other words, your liability for loss is limited to what you have directly invested in the business. Your home, your car, your retirement savings, etc., cannot be accessed to cover business debts.
You are also protected in your personal capacity from lawsuits. If your business is sued, your assets are not at risk.
Incorporation carries potential tax advantages. Businesses have flexibility when it comes to deducting business expenses, such as employee benefits, salaries, and retirement plans. There are certain tax deductions that are not available to sole proprietors or partnerships, such as start-up expenses, and you can spread losses over a longer period of time.
Access to capital
To raise cash, there are options available to companies that are not available to individuals. Financial institutions are more willing to lend to businesses than to private individuals, and companies can issue securities to attract investment. If a sole proprietor borrows money for the business, it is a personal loan, and lenders are less likely to take on this risk.
When a business is a separate legal entity, it has something called “perpetual existence”. This means the Pty Ltd. exists regardless of any change to ownership or management. If there are two directors and one dies, the business continues. If, instead, the two are in a partnership, the partnership must be dissolved on the death of one partner. A new partnership agreement must be drawn up to bring in a new partner. This continuity of the legal entity also makes it easier to sell your shares or to transfer ownership of the business, for example when you want to retire. It provides stability and sustainability and allows for long-term planning. It also means your enterprise does not die with you. This may be important if you have hopes of a son or daughter carrying on the business.
An incorporated business is perceived as professional and authoritative. You appear more reputable in the eyes of your customers and other stakeholders. There are certain types of contracts or financing arrangements that are only available to incorporated companies. By incorporating, you also protect your business’s name, your brand and its representation, e.g., logo and corporate identity.
Benefits to your employees
As a Pty Ltd. you can offer your staff benefits that would be difficult to provide as a sole proprietor, such as medical aid, a retirement plan, and employee share ownership options. This can help you attract and retain talent, especially scarce skills.
Disadvantages of incorporating your business
There are costs associated with incorporation that do not apply to sole proprietorships or partnerships (although a partnership requires a legal agreement to be drawn up and there is a cost for that). While the advantages of incorporation usually far outweigh the disadvantages, it’s worth having a discussion with an accountant to determine if it is the best option for your business idea.
There is also a much greater reporting obligation on an incorporated business. You must file annual returns with the CIPC and prepare annual financial statements. Your record keeping needs to be thorough and meticulous, as you are subject to more legal oversight than a sole proprietor. But this soon becomes habit and is not generally considered an obstacle to incorporation.
Help with your business
When deciding whether or not a Pty Ltd. is right for your business, it’s important to seek legal advice about the advantages and disadvantages, according to your needs and intentions as a business.
As attorneys, we will protect your interests and advise you on the most appropriate legal entity for your business. We’ll help you draw up a business plan, draft a customised memorandum of incorporation if appropriate, and register your company with the CIPC. Contact Simon on 086 099 5146 or email email@example.com to arrange a preliminary discussion.
The information on this website is provided to assist the reader with a general understanding of the law. While we believe the information to be factually accurate, and have taken care in our preparation of these pages, these articles cannot and do not take individual circumstances into account and are not a substitute for personal legal advice. If you have a legal matter that concerns you, please consult a qualified attorney. Simon Dippenaar & Associates takes no responsibility for any action you may take as a result of reading the information contained herein (or the consequences thereof), in the absence of professional legal advice.