The choice of business entity is important not only insofar as risk, protection from creditors, taxation, estate planning and perpetual succession is concerned but for factors so numerous and particular to particular circumstances that they will not be discussed at length.

The five most important enterprises currently in use in South Africa are :-

• The Sole Proprietorship
• The Partnership
• The Close Corporation
• The Company
• The Business Trust

The Sole Proprietorship

The Sole Proprietorship is usually operated in respect of relatively small enterprises involving only one person. As proprietor of the business the owner carries the full risk in respect of the business which may result in the sequestration of the owner's personal estate and in the event of such owner being married in community of property, the estate of his/her spouse.

The Partnership

In the case of a partnership, two or more partners pool their resources to conduct the business as partners like the case of the sole proprietorship they too carry the full risk of failure of the concern which may result in the sequestration of their personal and spouse's estates in the event of them being married in community of property should the partnership not have sufficient resources to meet its liabilities.

Close Corporation

A Close Corporation is an entity registered in accordance with the Close Corporations Act and endows such a body with a separate legal identity. In that a Close Corporation is a separate legal persona it can acquire its own rights and obligations independent to its members whose liability save in the event of such member having bound himself as surety, will be limited to the contributions of the members. A Close Corporation will enjoy perpetual succession in that it continues despite the death or other incapacity of its members unlike in the event of a sole proprietorship or partnership which would terminate upon the happening of such events. The agreement entered into between the members of a Close Corporation regulating their internal relationship between each other and towards the Close Corporation is called an Association Agreement. Save in the event of an association agreement providing otherwise, each member is entitled to participate in the management of the Corporation.

Companies

A Company is an entity registered in accordance with the Companies Act and endows such a body with a separate legal identity. In that a Company is a separate legal persona it can acquire its own rights and obligations independent to its shareholders whose liability save in the event of such shareholder having bound himself as surety, will be limited to the contributions of the shareholders. A Company will enjoy perpetual succession in that it continues despite the death or other incapacity of its shareholders unlike in the event of a sole proprietorship or partnership which would terminate upon the happening of such events. The agreement entered into between the shareholders of a Company regulating their internal relationship between each other and towards the Company is called a Shareholders Agreement. The shareholders of a Company as the contributors of capital do not necessarily participate in the day-to-day running or management of the business which functions are entrusted to Directors appointed by such shareholders.

Whilst the shareholders would exercise ultimate control in respect of the Company, the fact that the entity is managed by directors and the shareholder need not concern himself with the day to day management and running of same, provides an effective means of raising capital from the general public interested in investing in businesses. A company mobilizing capital from the general public may be registered as a public company and may or may not in turn be listed on the stock exchange.

The private company (Pty) Limited is aimed at the small enterprise not reliant upon public funding.

Business Trust

To understand the nature of a trust, it is necessary to understand the parties concerned therewith, namely:-

• The donor is a person who for various reasons has taken the decision to donate funds and/or assets to be held, utilized and/or otherwise dealt with by the Trustees appointed in accordance of the Trust Deed for the ultimate benefit of the beneficiaries.

• The Trustees are the persons appointed in accordance with the Trust Deed and who are charged with the control, management and responsibilities of dealing with the trust property for the ultimate benefit of the trust beneficiaries.

• The beneficiaries are the persons and/or entities nominated under a Trust Deed and who would ultimately benefit in respect of the trust property. The beneficiaries can either have a vested or non-vested right to the beneficial interest to the trust, one finding the average trust deed to contain discretionary powers endowing the Trustees with wide powers as to when to distribute Trust Income or capital.

Unlike :-

• The Sole Proprietorship where the sole proprietor is the owner of the business; and
• The Partnership where the partners are personally liable for the debts of the partnership if the partnership cannot discharge its liabilities; and

• The Close Corporation, where each member will accrue an asset in his personal assets in him holding members interest in the Corporation and having a loan account with the Close Corporation; and

• The Company where should a natural person be the shareholder, such person would hold the shares in his own estate together with any loan account which he may have in and to the Company;

the beneficiary in respect of a discretionary trust has no vested right to the beneficial interest and/or trust assets and thus has no attachable assets in his own personal estate other than any potential loan account which may accrue to him. This aspect makes utlisation of trusts in business particularly attractive in the aspect of protection from creditors and estate planning.

Whilst the above exposition is not intended to arm the reader with sufficient knowledge to make a decision as to which business entity to utilise, it is hoped that same would shed some light on the nature of the various business entities available in South Africa.

The table below further depicts the advantages and disadvantages of the various entities referred to above.

Download Business Trust Questionnaire here