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Different types of Legal Entities in South Africa and their pros and cons

Different types of Legal Entities in South Africa and their pros and cons

Sole Proprietorship

A sole proprietorship is when there is a single founder who owns and runs the business. This is the simplest form of business entity because the business is not separate from the owner.

Advantages

  • Only you have the authority to make decisions about your business.
  • Hassle free set up.
  • Owner maintains 100% control and ownership of the business.
  • Owner is entitled to all the profits.

Disadvantages

  • All risks of the business are borne by the owner.
  • Your assets can be seized to pay for business debt, and you are personally liable for any obligations.
  • If you wish to include another owner in your business, you’ll have to dissolve the sole proprietorship and form a new business entity.

Partnership

A partnership is when 2 or more co-owners run a business together. Partners will also pool their money towards a common goal, share specialised skills and resources.

Advantages

  • More partners equal more knowledge and expertise.
  • More capital and cash to work with.
  • Share the financial burden and expenses of running a business.
  • Even distribution of labour.

Disadvantages

  • Everyone is liable for debts whether they were caused by other partners or not.
  • Shared control of the business with your partner/s.
  • Every time a partner leaves or joins, the partnership must be dissolved and new partnership drawn up.

Proprietary limited company (Pty) Ltd

A private company, Pty Ltd or proprietary limited company is treated as a separate legal entity.

Advantages

  • The business is a sperate entity, so runs regardless of shareholder changes.
  • Shareholders are typically not liable for company debts.
  • Anyone acting recklessly or fraudulently can be personally liable for all or any debts of the Pty Ltd.

Disadvantages

  • Required to comply with many legal requirements.
  • Slightly challenging and expensive to register.
  • Cannot offer shares to the public or list the business on a stock exchange.
  • Two shareholders must be at a meeting, except when the company only has one shareholder.
  • All your financial statements may need to undergo annual auditing.

Public Company

A public company is a business that issues securities through an initial public offering and trades its stock on at least one stock exchange. The daily trading of the public company’s stock determines the value of the whole business.

Publicly traded companies are defined as public because, unlike Pty Ltd businesses, shareholders can be anyone who purchases stock. Anyone can then become equity owners of the business.

Advantages

  • Since you can sell your shares to the public, this offers you more capital to work with.
  • More business opportunities.
  • The risk is spread out amongst the various shareholders.

Disadvantages

  • Setting up a public company is more challenging.
  • Making decisions can take significantly longer due to the number of shareholders.
  • Documents and financials are public.

Trust

A trust is a legal arrangement whereby control is given to trustees to operate the trust in such a manner that benefits those elected as beneficiaries of the trust.

There are two types of trusts, inter-vivos and testamentary. Inter-vivos is created during the life of a person while testamentary is upon their death (i.e. to administer their estate to heirs/legatees etc.)

Advantages

  • Growth taking place in the Trust assets.
  • Manageable legal requirements.

Disadvantages

  • You don’t have full control of your assets, as the other Trustees also have a say in the matter.
  • Tax rate of trusts is 45% and the taxation thereof can be confusing.

Drafting Annual Financial Statements and the Different Types of Accounting Frameworks in South Africa

There are three applicable accounting frameworks currently active in South Africa.

These are.

  • Entity Specific Basis of Accounting,
  • International Financial Reporting Standards for Small and Medium Sized Entities (IFRS for SMEs), and
  • International Financial Reporting Standards (IFRS).

Entity specific basis of accounting is basically accounting policies elected by the management of the entity. These are policies seen by management as the best way to accurately account for the items within the financials.

Entity specific basis of accounting can be used in entities that are not specifically instructed to prepare their financial statements in accordance with IFRS of IFRS for SMEs. Examples include trusts regulated by the Trust Property Control Act and sole proprietaries.

IFRS is a set of accounting rules and standards that determine how accounting events should be recorded and accounted for. The IFRS standards are extremely specific and detailed. Where possible, entities opt for IFRS for SMEs which is a simplified version of IFRS. As the name suggests though, IFRS for SMEs is specifically for Small and Medium-sized Entities. Larger entities will need to apply IFRS. The deciding factors rest in the type of company created and the public interest score. Regulation 27 of the Companies Act Regulations contains specific guidance on which applicable financial reporting framework may be applied.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Kashveer Mathura

Accounting Portfolio Manager

kashveer@vhaaccounting.com 078 882 9783

Adrian Surjoo

Quality Control Manager, SAICA

Credentials:

  • National Diploma in Cost and Management
  • Accounting
  • Advanced diploma in Accounting Sciences
  • Professional Accountant (S.A.)

Bongumusa Zondi

Director

Bongumusa Zondi, a senior accountant, blends business advisory with expertise in financial reporting and taxation. With just under a decade of experience in accounting and taxation, his career journey began by obtaining a National Diploma in Cost and Management Accounting and an Advanced Diploma in Accounting Sciences at the Durban University of Technology and University of South Africa, respectively. This was followed by a Junior Bookkeeper position at City Printing Works (Pty) Ltd. He began his SAIPA articles at Dobeyn Accounting Soultions and currently leads a dynamic accounting team and manages a sizeable portfolio of clients at VHA Accounting Solutions where he also completed his SAIPA Articles. Apart from assisting clients update their books and stay compliant with relevant authorities, he is fully interested in adding value through business advisory. Helping clients solve their financial problems and provide guidance on potential growth opportunities is his biggest passion. He has been driven by philosophies of teamwork and collaboration.

Notable achievements include qualifying as a Professional Accountant (S.A.) through SAIPA. Beyond the numbers, he enjoys watching sports, tutoring grade 12 learners, playing the piano and listening to classical music composed by Wolfgang Amadeus Mozart and George Frideric Handel, adding a well-rounded dimension to his professional life.

bongumusa@vhaaccounting.com 082 359 4536

Karishma Bhola

Director

The VHA Accounting Solutions team is excited to announce a new insurance service offering headed by Karishma Bhola. Karishma is an accredited financial advisor and has 18 years of experience in the finance industry and expertise in marketing/foreign exchange and business management. As a seasoned financial guru, she prides herself on delivering excellent client service every time.

Vidyanth Bhola

Director / CEO

Passionate about exceptional client service, Vidyanth Bhola serves a wide client base as an advisor and accountant.Vidyanth focuses on tax planning and estate and succession planning, which he approaches with enthusiasm for human relationships and a penchant for teamwork, to achieve outstanding results. In addition to being VHA Accounting Solutions Inc founder and as director of the Bhola group of companies, Vidyanth is involved on the board and advisory level with several non-profit organisations and other initiatives. Vidyanth obtained his BCom degree and H Tax Diploma from the University of South Africa after which he worked at Colenbrander Inc, as a Accounting Portfolio Manager. In 2018, Vidyanth found the accounting firm VHA Accounting Solutions Inc. Vidyanth is a family man and avid rugby fan. He enjoys learning about Aviation and flew a Boeing in the flight simulator in Dubai. Vidyanth also works on various charity organisations and is involved in various food drives. Vidyanth is a member of the South African Institute of Tax Professional (SAITA) and the Southern African Institute for Business Accountants (SAIBA).