To Incorporate or Not to - that is the Question

Choosing an entity type for a business can prove to be a rather daunting task for some entrepreneurs. Depending on the business model, product or service type and regulatory framework, a number of factors may need to be considered.

Be that as it may, in this article I aim to unpack some of the principles which apply to personal liability companies. A personal liability company is where the directors of a company are jointly and severally liable for the debts of that company but where the legal identity of the company will be separate from its owners.

Overview 

Changing to an incorporation may be beneficial in that:

It provides limited liability for the owners,You may be able to retain the advantages of the sole proprietorship or partnership,There is perpetual succession and continuity of appointments, andEasier resolution of disputes of disputes between shareholders amongst others.

Personal liability companies must be registered with the Companies and Intellectual Property Commission (“CIPC”). The steps to be followed for registration include the following:

Registering as a customer with the CIPC,Paying the necessary funds,Reserving a corporate name,Completing the CIPC forms for incorporation and supplying the supporting documentation.

There are certain disadvantages to a personal liability company. These include the liability of the directors and past directors for the debts of the company, complying with onerous regulations and the costs involved with incorporating. Be that as it may, the entity type is still commonly used by associations, accountants and legal professionals.

When selecting a business structure it is important to consider the precise requirements of your business model, what components of the model do you have in place and may easily cater for as well as what components may be outstanding.

Additionally, entity types or business structures have key components or rather a recipe which acts as the building blocks of the structure but also the distinguishing markers between the different types.

Considering this it would be pertinent to consider the following, amongst others, when electing a business structure or entity type:

How many owners of the business are they?What are the tax implications of the business?How is the business going be financed?What is the regulatory framework?

Conclusion 

In addition to registering a business structure, regulatory framework surrounding the business may add an additional layer of complication finding that perfect fit. It is important to consider whether in addition to registering your business with CIPC, if there are any licensing or other registration requirements which apply to your business.

Contact an attorney at SchoemanLaw for your commercial needs.

“Incorporation, Sole Trader, Partnership” (1999), South African Institute of Chartered Accountants, www.saica.co.za Accessed on: 02 March 2022. 

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