Business Entities: A comparison
Sole proprietorship Partnership Close corporation Company
1. Nature The sole proprietorship is a business which is owned by one person in his/her own name, administered to his/her own advantage, and exclusively and fully at his/her own risk and responsibility.
A partnership is the legal relationship which arises when at least two people and/or legal entities contribute something (be it money, skill or labour) to a business enterprise with the object of making and sharing profits.
A close corporation is a separate legal entity apart from its members which can attract rights and obligations in its own name.
A company is a legal entity separate from its
shareholders, which can acquire legal rights and obligations in its own name.
2. Membership Any one individual (with the necessary contractual capacity) can be a sole proprietor.
Any individual (with the necessary contractual capacity) and/or legal entity can be a partner. The maximum number of parties who can be party to a partnership is 20 (minimum two).
Only natural persons can be members of a CC. The following persons can also qualify for membership: (i) A trustee under a
testamentary trust pro- vided no juristic person is a beneficiary of the trust and if the trustee is a juristic person, it is not controlled by a
beneficiary of the trust. (ii) An executor or
administrator (who can be a juristic person) in the estate of a deceased member.
Any person, natural or juristic, may be a share- holder in a company. Thus a CC can be a shareholder in a company.
A private company may have only one shareholder whereas a public company must have at least seven shareholders. A private company is restricted to a maximum of 50
shareholders, while there is no limitation in respect of the amount of shareholders n a public company.
Sole proprietorship Partnership Close corporation Company
2. Membership (cont.)
(iii) A trustee or curator (who can be a juristic person) of an insolvent estate of a member.
A trustee of an Inter Vivos Trust can hold a member’s interest in a Close Corporation provided the following requirements are met:
a natural person was immediately before 13/4/87 a member of the CC for the benefit of the trust. no juristic person is a
beneficiary of the trust. the member personally has
all the rights and obligations of a member.
the CC is not obliged to obligations of the trust. The total number of
members and trust
beneficiaries does not at any time exceed 10.
A company or another CC cannot hold an interest in a CC. A CC can have between one and ten members.
Sole proprietorship Partnership Close corporation Company
3. Creation and Organisation
The sole proprietorship is created by the voluntary action of the individual. There are generally no formal requirements which have to be observed before business can be commenced expect for compliance with possible licence requirements.
A partnership is created by the voluntary agreement of the parties and there are generally no formalities. The agreement may be either oral or in writing or even by implication. Usually there is a written agreement to avoid and resolve disputes re the terms of the agreement.
Incorporation takes place upon registration of the founding statement by the Registrar of Close Corporations. This is a document signed by or on behalf of the members of the CC and must contain various particulars as prescribed by the Act.
These include:
The full name of the CC. The principal business to
be carried on. The postal address. The business address. The full names and ID
number of each member. The size of each
member’s interest, expressed as a percentage.
The particulars of the members’ contributions. The name and address of
the accounting officer. The date of the end of
the corporation’s financial year.
A company is formed according to statute. The company comes into existence when the Registrar of Companies issues a certificate of incorporation. The Memorandum of Incorporation defines the limits of the company’s business activities and once registered, serves as a notice to the public of facts about the company which are of interest to those who deal with it.
The board of the company may make, amend or repeal any necessary or incidental rules relating to the governance of the company in respect of matters that are not addressed in the Companies Act 7 of 2008 or the Memorandum of Incorporation.
Sole proprietorship Partnership Close corporation Company
3. Creation and Organisation (cont.)
The internal organisation of a CC may be regulated by an association agreement. This could lay down the voting rights of its members, the transfer or disposal of a member’s interest the participation of members in profits document and does not have to be lodged with the registrar.
4. Capital Structure
There is no limitation on the amount of capital which a sole proprietor can use in his/her business. For obvious reasons, however, capital is limited to the means of the proprietor, and may be varied at his/her will.
There is no limitation on the amount of capital in a partnership, but for obvious reasons capital is restricted to what the individual partners are prepared to contribute. Capital can be increased or decreased by agreement.
* Capital in this context does not only include monetary contributions but labour and skills as well.
The members’ contributions constitute the “capital” of the corporation. When a CC is formed, each member must make an initial contribution. This contribution can be in the form of:
(i) an amount of money (ii) property (corporeal or
incorporeal); (iii) services rendered in
connection with and for the purposes of the formation and
incorporation of the CC.
The capital of a company is limited to an amount authorised in the Memorandum of Incorporation. This amount can be increased or diminished only by proper amendment of the memorandum as permitted by law. Company capital is often raised by means of long-term liabilities, debenture issues and loans from directions or shareholders.
Sole proprietorship Partnership Close corporation Company 4. Capital Structure (cont.) There is no restriction as to the contributions of members.
Note: It is not required that the size of a member’s interest in the corporation be related to the value of his/her contribution. 5. Relationship –
Individual to Business
The undertaking is not a juristic person separate from the owner. The owner and his/her business are one and the same and thus. All the rights and liabilities of the business are legally those of the proprietor himself/herself.
A partnership is not a juristic person separate from the parties who constitute it. Therefore the partners can be held jointly and severally liable. However, when parties enter a partnership relationship, their
contributions do go towards forming what can be called the “partnership estate” which is separate from the partners’ personal estates. All the property in this “partnership estate” is owned
jointly by the partners in undivided shares in such proportions as they have agreed upon.
The corporation and its members are separate juristic persons. Each member of the corporation stands in a fiduciary relationship to the CC. In general, this means that a member must act honestly and in good faith and avoid any material conflict between his/her own interests and those of the CC.
The company is a separate juristic person from its shareholders. The
shareholders own the shares in the company. The company’s assets are independent from those of the shareholders.
Sole proprietorship Partnership Close corporation Company
6. Liability for Debts
The proprietor is personally liable for all debts.
The debts of the partnership are shared by the members in such proportions as they have agreed upon. Should the partnership estate be unable to meet the claims of creditors, the partners personal estates will be liable.
As a juristic person, the CC is liable for its obligations. Members can, however, become jointly and severally liable under certain circumstances. These include:
(i) where transactions are entered into without using the abbreviation CC or BK in the name. (ii) by failing to make
contributions as required in the founding
statement.
(iii) where the number of members exceeds 10 for a period of six months. (iv) where a person takes
part in the management of the CC while he/she is disqualified.
(v) where the office of the accounting officer is vacant for six months. (v) where a court is satisfied
that the business has been carried out recklessly, with gross negligence or with intent to defraud.
The liabilities of the company are binding on the company and not the shareholders. However, in practice directors/shareholders are often required by creditors to stand security for debts of the company. In certain instances, the directors can be held personally liable.
Sole proprietorship Partnership Close corporation Company
6. Liability for Debts (cont.)
(vii)Where certain payments are made to a member, unless:
After such payment the CC’s assist, fairly valued, exceed all its liabilities, or
The CC is able and will continue to be able to pay its debts as they become due in the ordinary course of business. 7. Period of Legal
Existence
The sole proprietor can sell or liquidate his/her lifetime. If he/she is still owner of the business at his/her death, the business assets will either be sold by the executor or transferred to the heirs or successor.
Any licence, goodwill or legal agreements entered into on behalf of the business ceases on the death of the sole proprietor
Various circumstances can cause the dissolution of a partnership. These include: The expiry of the period
for which the partnership for which the partnership was formed:
The completion of the task for which it was formed.
The entry of a new partner.
The retirement of a partner.
The insolvency of the partnership or a partner,
A close corporation has perpetual succession in that the death, retirement, etc. of a member does not cause its dissolution. However, there are circumstances where a CC will cease to exist. These include voluntary termination by winding up or the liquidation of a CC in terms of an order of court.
The life of a company is perpetual, unless limited in terms of a charter, by-laws or statute, or unless it is wound up. The death of a shareholder, therefore, does not affect the company continuity as an independent legal body.
Sole proprietorship Partnership Close corporation Company
7. Period of Legal Existence (cont.)
i.e. The sole
proprietorship does not benefit for perpetual succession. Inability of the partnership to perform; Dissolution by mutual agreement or court order; death of a partner. 8. Taxation All the profits of the
business belong and accrue directly to the sole proprietor. As a result, all the profits are taxable in the hands of the sole proprietor at his/her marginal rate of tax. Sole proprietors are provisional taxpayers.
Each partner is taxed on his/her share of the partnership income whether withdrawn or not. This share is then added to the partner’s other taxable income. If a loss is made by the firm, each partner may deduct his/her share of the loss from his/her other income.
If a partnership receives dividend income, the dividend income is apportioned to the partners separately form the trading income.
Partnerships are provisional taxpayers.
A CC pays income tax at a rate of 28% on its taxable income.”
From 1 April 2012, a withholding tax on profits distributed is levied at a rate of 15% on dividends, which replaces STC and which is a tax liability at member level. It is required to pay
provisional tax each half year during its financial year and a third “topping up” payment within six months after the end of the tax year, if necessary. Members of a CC are provisional taxpayers.
A company pays tax at a rate of 28% on its taxable income.*
From 1 April 2012, a withholding tax on profits distributed is levied at a rate of 15% on dividends, which replaces STC and which is a tax liability at shareholder level.
Companies as provisional taxpayers, are required to pay tax each half year and a third “topping-up” payment within six months after the end of the tax year, if necessary.
Shareholders are not provisional taxpayers purely by reason of being
shareholders.
Sole proprietorship Partnership Close corporation Company CGT Inclusion rate: 33.3% Effective rate: 0 - 13.32% Inclusion rate: 33.3% Effective rate 0 - 13.32% Inclusion rate: 66.6% Effective rate 18.65% Inclusion rate: 66.6% Effective rate 18.65% 9. Estate Duty For estate duty purposes,
the value of the business on the death of the sole proprietor forms part of his/her estate.
A partner’s share in the partnership is subject to estate duty in the same manner as his/her assets.
A deceased member’s interest is property in his/her estate for estate duty purposes.
A shareholder’s share in a company is subject to estate duty.