A big thank you to the RMI 4 Law members for their suggested topics. In a series of articles over the next issues, we will review the various forms of business enterprise available to members. Attention will only be given to relevant forms of enterprise, suitable for conducting activities aimed at profit. Less relevant structures, such as shareblock companies, co-operative societies and professional incorporated companies, as well as non-profit organizations, such as Section 21 companies will fall outside the ambit of our review.
In this issue we will deal with sole proprietorships and partnerships, whilst the next issues will be about close corporations, companies and business trusts.
The selection of a form of enterprise must be an informed one, as important consequences will follow such choice. Criteria such as: The number of natural or legal participants, taxation, limitation of liability of participants, formalities and costs of formation and level of participation in management may all assist in making the right choice.
A sole proprietorship remains popular as there are relatively few legal requirements and formalities to be complied with and the costs of establishment remain relatively low. Some of the advantages are:
P The owner has the sole right to all the profits;
P It is subject to very little control by the authorities, although licensing requirements and the obligation to submit tax returns still apply;
P There is no financial audit requirement;
P It can be terminated easily and without formality.
Conversely, the disadvantages are:
x The owner carries unlimited personal liability for the debts of the business;
x The death of the owner automatically terminates the business, leaving no prospect of succession and attracting taxes such as Estate Duty and Capital Gains Tax;
x The creditworthiness of the business is dependant on the financial means of its owner.
A partnership may be described as a sole proprietorship where there is more than one owner. This form has become less popular of late, due to changes in the business environment, including the advent of the close corporation as an alternative. A partnership comes into being as a contractual relationship between the parties with the object of making a profit and can be entered into verbally or in writing.
The fact that partners are able to pool their resources is an obvious advantage. Under certain circumstances, the taxation of a partnership may be more advantageous than some other vehicles, due to the fact that the partners are taxed in their personal capacities. Depending on the circumstances, this may however also be a disadvantage.
A major disadvantage of a partnership, is that it does not have a juristic personality separate from the partners. Partners remain jointly and severally liable for the debts of the partnership. Upon the death of a partner, the partnership automatically dissolves and may bring about severe and unintended consequences. If a partnership goes insolvent and is liquidated, the personal estates of the partners are also sequestrated.
To join, contact RMI 4 Law at 0861 668 677
Automotive greetings from RMI 4 Law.