Where To Begin With A New Business?

You might have decided that it is time to start your own business, you have identified the perfect premises from where the business will operate and you may have also contemplated to approach a potential partner or two. The finances are in place, but you are still brainstorming on what needs to be done and what business entity will best suit your particular business desires.

Let us highlight your basic principal obligations.

First and foremost it is important to understand that to run a business requires a lot of time, commitment and dedication and that you need a proper business plan from which you will operate. A business plan will also be very important in the event of applying for finance and even to approach a business partner. It further entails that you should be conversant with the content of the lease agreement of the premises and whether there are options available for renewal of the lease.

It must further be established whether any licences or permits are required for the operation of the business. Some types of businesses that relates to health care, food, liquor, gambling etc. requires a licence to lawfully trade. It is therefore important to timeously identify these requirements in order to lodge the necessary applications since any trade in respect of these type of businesses will not be allowed.

When all the steps above, amongst others, have been disposed of, you will have to decide from which business entity you will operate. There are a few options available and the choice will have important consequences for yourself and your business. The most prominent business options to consider are the following:

Sole Proprietor

This option entails one owner where you will operate your business in your own name. You are allowed to make use of a business name, but the business as such will vest in you personally and does not consist of a separate legal entity. This is the most basic form of business and requires little, in comparison to other entities, to get off the ground. The biggest risk factor in this type of business is that, in the event that the business will fail, the business owner shall be personally liable for all the business’s debts and can the creditors seize upon your personal assets. Furthermore, this business form does not allow for partners, but further employees may be employed. Options for finance will also depend on the size of the business for which the owner will personally qualify.

Partnership

A partnership is established where two or more (to a maximum of 20) partners takes hands to trade or to operate a business or profession. A partnership does not have a separate legal entity from its partners and thus all partners will be personally liable for losses and share in the profits. This business form is relatively easy to establish by preparing the necessary partnership agreement that will regulate the feature relationship of all the partners and each partner’s contribution (whether by money, labour or expertise) towards the partnership. Due to the fact that there are two or more (to a maximum of 20) partners, this type of business entity is normally in a stronger financial position than the sole proprietor and the partners can combine their respective power to make a success of the business. Partners are all liable though for the business’s obligations and any thoughtless action can have devastating consequences for each partner and even the survival of the partnership. This form of business is usually found by professionals such as attorneys, doctors etc.

Close Corporation

As from 1 May 2011, no further registration of close corporations will be possible, but existing close corporations may convert to companies by filing, amongst other required documentation, a notice of conversion. Conversion is, however, not compulsory and close corporations will continue to exist until deregistration or dissolution in terms of the Close Corporations Act, 1984. Close corporations will be treated as private companies and are subject to the same audit requirements as private companies.

Private Company

A private company is considered to be a separate legal entity independent from its members and thus it has its own rights and obligations. This business entity is also dealt with as a separate taxpayer. The owners of a private company exists out of its shareholders and is managed by its directors. A shareholder can also be a director of the company, but this need not necessarily be the case. The benefits of a private company includes, amongst others, the limited liability of its shareholders with regard to the company’s obligations as well as the continuity and transfer of the business due to the fact that it is not linked to the owners but to the entity itself. The establishment, management and functioning of the company is dictated by the provisions of the Companies Act of 2008 which can make this type of business more complex and expensive.

The decision regarding the most relevant type of business structure is one which cannot be taken without legal- and even tax advice. Further implications surrounding the number of members, financing, administration costs, business continuity and insolvency issues are also aspects that needs consideration in the run-up to your business decision. When the applicable business entity has been identified, the following tax obligations needs mentioning:

– Register at the Receiver of Revenue for paying income tax, employee tax and skills development levies in respect of employees.

– In the event that you suspect that your turnover might exceed R1 million per year, you are obliged to register for VAT (Value Added Tax). You may also apply for voluntary VAT in the event that you suspect that your turnover will be more than R50 000 but less than R1 million per month.

Your business might even qualify for certain tax benefits created by the Receiver of Revenue for small business enterprises.

Employees are an important asset for any business. Consequently, it is paramount for you as an employer to make provision for a safe working environment and also to register with the occupational injuries and compensation Fund to ensure employee protection against injury on duty. The business owner is lawfully obliged to register with the Fund for yearly contributions, irrespective of the size of the business.

An employer should register with the Unemployment Insurance Fund (UIF) to make provision for, amongst others, employees on maternity leave or otherwise not able to perform their duties. The UIF serves as temporary relief for the employees aforesaid.

The employer is also obliged to draw up a service agreement for all employees which sets out all terms and conditions of their employment and supply monthly salary slips indicating all rightful deductions.

Now that you have identified the business entity, complied with your registration obligations and correctly organised your employees, you need to consider your marketing strategy. It is advisable to design and register a trademark to differentiate your business from others and also with a possible view of franchising your business in the feature.

The above is just a concise summary of the steps towards commencing your own business, which may be a complex process with all the attendant costs, but if managed correctly it can avoid a myriad of complications in feature.

Consult with your lawyer and be prepared to start your own business with the correct advice

By

Francois van Zyl
Associate
francois@dyason.co.za