Deciding on the Form of Ownership for your New Business

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One of the first issues facing any entrepreneur who wants to launch a business is choosing a form of ownership. Indeed, this decision can have a tremendous impact on almost every aspect of the business. Therefore different forms of business ownership in South Africa are:

  • The sole proprietorship – is owned and managed by one individual and is by far the most popular form of business ownership.
  • The partnership – a contractual relationship between two or more persons (called partners), but usually not more than twenty who operate a legitimate business to which each contributes something, with the purpose of making a profit which is distributed amongst them.
  • The company – (which functions in terms of the Companies Act 61 of 1973, as amended). It’s developed to meet businesses’ needs to obtain more capital than they could through a sole proprietorship or partnership.

However, before taking the different forms of ownership into account, you should consider the following factors before deciding on one:

Factors to consider in choosing a form of ownership for your business

  1. The legal personality of the business. Can the business, from a legal point of view exist independently of its owner(s) and have its own assets and liabilities (possessions and obligations)?
  2. The liability of the owner(s).This is linked with the first point. Are the owners liable for outstanding debts and claims against the business?
  3. Owner control and authority. The degree to which the owner(s) has/have direct control and authority over the activities of the business. Also, the application or use of assets and the distribution of the business’s profits plays a role.
  4. The capital acquisition potential. The capital acquisition potential of the business when it is first founded, and in the event of expansion later on, should be considered. Here factors such as the number of owners permitted, their liability and their say in the management all play a role.
  5. The possibility of change of ownership. In other words, the ease with which an owner can transfer his or her interest in the business to someone else. Related to this is the lifespan or continuity of the business.
  6. The legal requirements. Legal requirements regarding the establishment, management and dissolution of the business should be taken into consideration.
  7. Tax considerations. Tax payments to the government differ depending on the form of ownership.

Concluding

After all, it doesn’t matter what form of ownership you choose, as long as you can live with it, and also make some money!

Remember, you need a well researched and written Business Plan to get your business off to a good start!

Note:

Cronje de J, G.J., Breebaart, H., De Klerk, A., Old, S., Swanepoel, E. and Van der Merwe, M.A. 2001. Introduction to Entrepreneurship and Small Business Management, Only study guide for MNE202-V, Department of Business Management, UNIVERSITY OF SOUTH AFRICA, PRETORIA.

Image: Pexels

Read also: Questions about your business that you should answer before starting your own business

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