RSM South Africa

Business entities and the appropriate vehicle

Over the last two years or so, there have been some major changes in acts and law that may affect the choice of the vehicle that is used for conducting business. Now may be the right time to re-assess the appropriateness thereof.

A few areas where significant changes have taken place are inter alia

  • Companies Act, 2008;
  • Close Corporations Act, 1984
  • Consumer Protection Act, 2008
  • Case Law on trusts and the alter ego principle.

The way in which business is conducted and the vehicle through which this is done may be affected by the above and other changes.

This article aims at tickling thoughts and initiating reviews rather than trying to be a comprehensive checklist and implementation tool.

The most commonly known vehicles that are used to conduct business are the Sole Proprietor, Partnership, Trust, Close Corporation and Private Company. Listed and public companies, non-profit organisations, clubs and other charities are excluded from this discussion.

Some of the factors to take into account and their most likely applications are shown in the table below:

  =  most likely

 

Score  =  depending on the entities’ score in terms of the new Companies’ Act.

 

 

Sole

Proprietor

 

 

Partnership

 

 

Trust

 

Close Corporation

 

 

Company

 

Simple structure and low administration cost

 

Sometimes

 

Sometimes

 

Sometimes

 

Limited liability

 

 

 

Compulsory Audit

 

 

 

 

Sometimes

 

Score

 

Score

 

Compulsory Review

 

 

 

 

 

 

Score

 

Split between management and ownership

 

 

 

 

 

Succession friendly

 

 

 

Prescribed accounting framework

 

 

 

 

Score

 

Score

 

New registrations

 

n/a

 

n/a

 

 

Easy transferable ownership

 

 

 

 

Tax friendly

 

Sometimes

 

Sometimes

 

Regulated by specific law

 

 

 

Staff incentive by ownership

 

 

 

 

 

Generation skipping

 

 

 

 

 

Protection of Assets

 

 

 

Existing Close Corporations remain in place for the time being, but new Close Corporations cannot be registered as from 1 May 2011. Furthermore, the Companies Act 2008 requires that a Close Corporation must also be scored to determine the appropriate accounting framework and compulsory audit requirement.

With trusts it is now more clear than ever before that independence between trustees and beneficiaries is an important principle. Trust deeds may need to be amended. More importantly the way trusts are administered and how trustees deal with the day to day business of a trust may need serious transformation.

Sole proprietorship will always have a place in business, however due care should be taken in the consideration of this option, taking into account the various benefits that other vehicles have to offer.

A partnership is like a marriage. Furthermore, the matter of joint and separate liability causes that its use is mainly found in professional practices, where professional liability cannot be avoided in any event. It is also found to be used for husband and wife or other close family business entities. Again here, the benefits that other available vehicles have to offer should not be ignored.

The benefits that detailed law on Companies, Close Corporations and even Trusts have to offer is a factor that may make the additional cost and effort, your insurance premium, money and time well spent.

A combination of vehicles can also be considered, for example, a Trust holding shares in a Company, or holding a Member’s interest in a Close Corporation.

Rethinking the vehicle through which business affairs are being conducted is important now but also a continuous process. It should be on the agenda of any business enterprise on a regular basis.

Bart Kooi

Managing Partner, Tshwane