How to start your business

5 STEPS TO STARTING YOUR BUSINESS

Register your business – your idea is bigger than you
Create a business plan – failing to plan is a sure plan to fail
Finance your business – you need money to make money
Market your business – no customer will come to you, without you letting them know of your existence
Resource your business – the right people and equipment is key

FORMS OF OWNERSHIP

There are several types of business which can be formed and operated on a small scale, these include businesses that are owned and run by one person, i.e. a sole proprietorship, as well as businesses that have a membership of up to ten members (close corporation) and those of up to fifty people, i.e. private companies.

There are different legal requirements governing the formation and management of these forms of business, therefore the decision on which form of business to start or join depends on a number of factors, such as availability of start-up capital as well as the various advantages, or disadvantages, inherent in each form of business.

1. Sole Proprietorship

A sole proprietorship is a business that is owned by one person and is not registered with the state as a corporation or a limited liability company (LLP). Because the business is not a separate legal entity, its assets and the personal assets of the owner are considered to be one, therefore the owner is personally liable for debts incurred by the business.

A major advantage of a sole proprietorship is that it is easy to set up and maintain, the only legal requirement being a trading license (and maybe also registering for some applicable taxes, e.g. income tax). Other advantages of this type of business include the following:

• all the profits of the business belong to the owner,
• the business itself does not pay taxes on its profits,
• the owner consults with, and reports to, no one about management decisions.
• it is easy to transfer ownership of the business by sale.
• There are however major limitations associated with this type of business, such as the following:
• the principal source of capital is the owner’s personal wealth or credit-worthiness for borrowing purposes,
• the business usually terminates automatically upon the death or incapacitation of the owner,
• the business does not always benefit from varied management skills as it is run by one person.

2. Partnership

A partnership is an association of two or more (up to twenty) persons who come together to form a business with the motive of making a profit.

Partnerships are often favored over corporations for tax purposes, because a partnership structure may eliminate the dividend tax levied upon profits realized by the owners of a corporation.

The most common form of partnership is the general partnership, in which all partners manage the business and are personally liable for its debts. Two other forms that are commonly found in most countries are:

• the limited partnership (LP), in which certain “ limited partners “ give up their right to manage the business in exchange for limited liability for the partnership’s debts,
• the limited liability partnership (LLP), in which all partners have some degree of limited liability.
• There are at least two legal requirements for a partnership to come into existence:
• there must be a valid partnership agreement between the parties, which can either be written down or verbal. The agreement will normally deal with such issues as • formation of the business,
• how profits, and losses, will be shared by the partners,
• salaries,
• banking arrangements,
• changes of partners,
• liquidations,
• responsibilities of partners, etc.
• a trading license will also be required for the type of goods or services provided ( and registration for applicable taxes)

Some of the advantages enjoyed by partnerships include the following:

• the business does not pay taxes on its profits, instead the partners are taxed on their shares of the profit,
• there are multiple sources of capital,
• the management responsibilities are shared among the partners.

Among the disadvantages are the following:

• a business decision made by one partner is binding on all members, regardless of its consequences • decision-making is often delayed by consultations • profits are shared among the partners.

3. Private Company

A private company is a business entity that is owned by its founders, management or a group of investors, and their shares cannot be sold to the public. In terms of the Company Act, 1973, a private company must have at least one to fifty (50) shareholders, who are often referred to as the directors of the company. Registered private companies are granted the Proprietary Limited or “(PTY) Ltd” status.

The main advantage of a private company is that management does not have to report to any shareholders and is not legally compelled to disclose its financial statements. On the other hand, a private company has limited sources of capital because the general public cannot buy its shares, therefore it has to turn to private funding, which can increase the cost of capital and limit expansion.

The registration procedure for a private company involves a detailed process for which the services of attorneys must be used in the registration process.

The registration process involves the following steps:

1.Contact the Department of Trade and Industry
2. Complete the following forms:
• Reservation of a company name, Form CM5
• Authorization of situation of registered and postal address, CM22
• Power of Attorney – Notification to act on behalf of promoters
• Return containing particulars of directors, officers, CM29
• Consent to act as auditor, CM31
• Application for certificate to commence business, CM46
• Statement by directors regarding adequacy or inadequacy of share capital, CM47
• Memorandum and articles of association.
3. Payment of prescribed fee.

4. Close Corporation (CC)

A close corporation is a business owned and managed by not more than 10 members, who have a close relationship and want to start up with simple administration and legal procedures. Their interest in the business must always add up to 100% and be expressed as a percentage. The close corporation must be profit making in its intentions.

The advantages of this type of business include the following:

• it is a legal entity on its own
• meetings are not compulsory and can be held on an ad hoc basis
• CCs may become shareholders in other companies
• all members may take part in management
• the proprietor or member is not personally liable for the debts of the CC
• the legal procedure for registration and administration are kept relatively simple.

Registration Procedure of a closed corporation (CC)

Basically there are two steps that must be followed in the registration process:

1. Application for reservation of the name of the business.

The form that is required to reserve a name is the CK47 form, “Application for Reservation of Name or Translated Form or Shortened Form. The person lodging the CK47 must be a registered Cipro customer.

This must be submitted in duplicate to the Registrar of Companies and Close Corporations, P.O. Box 429, Pretoria 0001, Tel (012) 310 9791 together with a registration fee of R50 (unless otherwise changed). A separate CK47 form is submitted for every other name together with R50 for each application.

2. Close Corporation Founding Statement.

Once the proposed name of the CC has been approved and reserved, the registration of the CC is processed. The registration process begins with the completion and submission of the Close Corporation Founding Statement (CK1) in duplicate, to the Registrar, with a payment of R100 (unless otherwise changed).This statement must be signed by all members. A consent letter from the Accounting Officer must accompany the CK1 form.

The name of the corporation must be followed by the abbreviation CC.