Legal Talk

A sole proprietor or sole trader is normally used when a 'natural' person owns and runs a business. According to the law a person can be either a natural or legal person. Natural person simply means a human being whilst a 'legal' or 'juristic person', which could mean a company, trust or close corporation. A sole proprietorship is regarded as the easiest way to start a business in South Africa. In this instance the business is owned by one person and as owner is also personally liable for all debts of the business. The advantage of such a business is that it's relatively easy to set up. Save for the start up costs of that particular business, there are no formal legal requirements needed one needs in order to set up the business. As a sole proprietor you are your own boss and therefore you have the freedom to make decisions pertaining to the way the business operates. The disadvantage of a running a business as a sole proprietorship, lies in the fact that there are huge risks which the owner will personally assume regarding any losses suffered or debts incurred. Also in the event of the death, retirement or insolvency of the owner, the business will close. Hence there is no guarantee of continuity of the business.

A partnership is another option to consider if there are two or more persons who want to go into business together. Partnerships are similar to sole proprietorships with the difference being that in a partnership there is more than one person who owns the business. A partnership, like a sole proprietor does not require any formalities to set up and it carries the same personal liability for debts for all the partners. The partners would normally have a partnership agreement drawn up and signed, in which all the details surrounding each of the partner's shares, contributions to the partnership and other such information is set out.

According to the Companies Act 2008, which came into effect as from 1 May 2011, companies are categorized into profit companies as well as non-profit companies including the so-called "Section 21" companies. Under profit companies, we have private companies, public companies and state-owned companies. Close corporations or CC's as they are commonly known, offer limited liability, similar to a company. Many small business owners often choose to operate their business through such CC's, by registering their businesses as CC's. However as from 1 May 2011, close corporations are being phased out and ultimately will cease to exist altogether in the distant future. At the moment all existing close corporations will be allowed to function but no new close corporations are registered. Close corporations are also encouraged in terms of the Companies Act to convert into a private company. In terms of business risk, the most effective way to reduce personal liability when engaged in a business venture, would be to run the business through the structures of a private company or through a commercial trust.

Know your rights! The Law Desk of Fawzia Khan and Associates. Giving You the Power of Attorney. Email fawzia@thelawdesk.co.za or call 031-5025670 for legal assistance at competitive rates.