South African Entrepreneurs are Rushing to Restructure their Business—Here’s why!
As a result of the economic and social consequences of COVID-19, choosing between restructuring and a permanent total shutdown is a reality for many businesses. Here’s why the correct Business Structure to your business idea is so critical.
In South Africa, for every success story, several businesses do not make it through the first two years.
To survive and thrive, businesses need a lot more than an exceptional product, service and online presence. Entrepreneurs must structure or restructure their business correctly.
You wouldn’t start a business if you didn’t think it could work, right? Well, that’s what Christiaan Pieterse and Meryl Watson thought too. Christiaan Pieterse traded out of a sole proprietorship.
Christiaan never sought the advice of a professional who could tell him how to protect his business and family if something were to happen to him. Sadly, when Christiaan passed away suddenly, his business came to a permanent standstill, leaving his family destitute.
Meryl Watson was in no better situation. Meryl traded out a private trust with the incorrect beneficiary structure. As a result, this had a detrimental effect on Meryl’s tax choices, causing her to lose hundreds of thousands of Rands that could have been used to pay off her bond and daughters university fees.
If Meryl had listened to the advice of a legal business advisor when she started her business, not only would her home be paid off in full, but she would have a savings pocket today.
The right legal business structure is of great importance. Life, the economy, profit margins, partnerships or new ownership can cause changes that can either leave entrepreneurs in debt or families hundreds of thousands or millions of Rands out of pocket. It happens, but success happens too—especially to those that “structure for success.”
The sooner we restructure—the better
Business structure is critical, and to survive and thrive, entrepreneurs must routinely review and assess their current position, business goals, and turnaround strategy, for moving forward in times of a crisis. While the incorrect legal structure can send any business to its knees, the correct legal structure can allow for:
• Efficient business continuity
• Massive savings on administration
• The opportunity for finance; and
• Tax for both the owner’s income and the business.
Every business idea is unique. Just as ideas differ, so does the legal structure that holds a business together. Here are a few examples of legal structures:
1. Sole proprietorship—easy to form and offers complete managerial control to the owner. However, the owner is also personally liable for all financial obligations of the business.
2. Partnership—used by doctors, lawyers and auditors, this structure involves two or more people who agree to share in the profits or losses of a business.
3. Private Company (Pty Ltd)—the preferred choice of both foreign and local entrepreneurs, this structure requires only one shareholder and one director. Considered as a separate legal entity, a private company is taxed in its own right, which offers shareholders protection against liabilities.
4. Public Company (Ltd)—with the intention to raise money, this structure offers shares to the general public. As a separate legal identity, this company is taxed in its own right, offering shareholders protection against liabilities.
5. Trusts—a magnificent vehicle to hold wealth, this non-profit business structure is not suggested for trading but for supporting disadvantaged people or cultural activities. Apart from reasonable compensation for services rendered, stakeholders do not receive property or income from the company.
Just about every business in South Africa faces an uncertain future. But South African entrepreneurs can maximise their chances of survival—and a great place to start is with an honest assessment of their business and environment.
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