A business structure explains who owns the business, who makes decisions and who carries the business liabilities.
Three common structures are:
- sole proprietor
- partnership
- private company
There is no one best structure - it's about what suits you best. A useful question is:
Which structure fits the way your business works now, and where you want it to go?
Start with the quick comparison
| Structure | What it means | May suit | Main point to understand |
|---|---|---|---|
| Sole proprietor | One person owns and runs the business | A simple, owner-run business | The owner and business are not legally separate |
| Partnership | Two or more people own and run the business together | People combining money, work or skills | The agreement between the partners must be clear |
| Private company | A registered business with its own legal identity | A business preparing for growth, contracts or shareholders | It has more records and ongoing responsibilities |
Here's what each one means in reality.
Sole proprietor: one owner
Definition
Sole proprietor
One person owns and runs the business. The owner and the business are not separate legal persons.
A sole proprietor may use their own name or a trading name. Because they own it, the sole proprietor alone receives the profits, makes the decisions and is responsible for the business debts and risks.
This structure may suit a freelancer, repair business, informal seller, tradesperson or mobile service provider working alone.
When being a sole proprietor may fit
You repair household appliances by yourself. You have regular customers, a small amount of equipment and no co-owner.
A sole proprietor can be simple to manage, but they still need to:
- keep records, invoices and do correct tax management.
- manage risk - if the business owes money or faces a claim or lawsuit, the owner may be personally responsible.
Partnership: two or more owners
Definition
Partnership
Two or more people run a business together and share its profits and losses.
The partners may combine money, equipment, customers, experience or work. This can help the business grow, but the partners need a clear agreement.
The partnership agreement should at least explain:
- what each partner contributes;
- how profits and losses are shared;
- who may make decisions;
- what happens if a partner leaves.
These questions are easier to answer with a partnership agreement before there is a problem, so it's critical to have one in place.
Private company: a separate legal business
A private company is registered through CIPC and has its own legal identity. This means the company is legally separate from the people who own it.
Definition
Shareholders and directors
Shareholders own the company. Directors are responsible for managing it. In a small private company, the same person may be both.
A company may suit a business that wants to work with larger clients, add new shareholders, employ people or continue beyond one owner. It may also help when clients, banks or finance providers ask for formal company documents.
A company has more ongoing compliance and management responsibilities. It needs proper records, separate banking, tax management through SARS and the required CIPC information and submissions.
Which structure fits your business?
There is no single best structure.
- A sole proprietor may suit one owner who wants a simple setup.
- A partnership may suit two or more people who want to combine money, work or skills.
- A private company may suit a business preparing for larger contracts, shareholders or long-term growth.
Answer these questions about your business:
These sentences can help you explain the business clearly to an accountant, tax practitioner or legal adviser.
They may also show you where an agreement is not clear.
Is the person helping you an owner?
A person who helps with your business is not always an owner. A family member who does the bookkeeping may be helping. An employee who speaks to customers may be managing part of the work.
Ownership is very different. An owner has an agreed share in the business, its profits, its losses or its decisions.
Can the structure change later?
Yes. A sole proprietor may later register a private company. Partners may move the business into a company. A company may add shareholders as it grows.
Changing the structure may also affect bank accounts, contracts, assets, tax, licences and supplier records. Check these changes with the relevant authority or a qualified adviser before you act.
A common mistake
Do not choose a company only because it looks more professional. Do not keep an old structure only because it is familiar. Choose the structure that fits the ownership, risk, plans and administration of the business.
Keep learning
The next topic is what records must I keep?
The structure creates the framework. Your everyday money habits make that framework useful.