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THE RIGHT BUSINESS STRUCTURE FIT FOR YOU: CONSIDERATIONS FOR A TAILORED CHOICE

05.08.2021
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The majority of us cannot afford to have our clothing tailored to our personal taste. We often shop from the pool of varieties and sizes available. It takes a personal, life-changing occasion to draw us toward creating something unique and memorable, for example, a wedding or graduation ceremony. Perhaps, we can have the same approach to deciding on the right structure for your business idea. Starting a business is a personal, life-changing event, indeed. Should it not be afforded it the same attention, care, and reverence?  Attention, care, and reverence come from understanding the differences between profit, non profit, and personal liability companies.

Profit Companies v. Non-profit Companies

In South Africa, companies are incorporated and regulated by the Companies Act 71 of 2008. There is a difference between a non-profit company (NPC) and non-profit organization (NPO). The latter is established and regulated by the Non Profit Organizations Act 71 of 1997 (“the NPO Act”). The NPO Act defines a non-profit organization as “a trust, company or other association of persons established for a public purpose; and the income and property of which are not distributable to its members or office-bearers except as reasonable compensation for services rendered”.

Only a trust, company or other associations of persons established for a public purpose (voluntary association) can be registered as a non-profit organization. Registering as a non-profit organization is beneficial because it will improve credibility and funding opportunities, allow the organization to open a bank account and can help with tax incentives.

The success of a “for profit” business is its ability to generate profit while achieving organizational goals. Its primary mission is to develop goods and services that serve consumer needs and generate income for the company. Non-profit companies and organzations are usually focused on a social cause or advancing a specific agenda. Measuring its success is based on accomplishing this focus.

Profit-driven businesses tend to choose loans and investors to get the company off the ground, and also rely on profit-generation to sustain the business in the long-term. A non-profit business model rely on public or private donations of volunteer time and money, and if the cause is significant enough, may acquire corporate sponsorships. Government grants are also a useful funding option. The ideal form of funding for non-profit companies or organizations would be to secure a combination of these forms of funding to ensure that the cause is adequately supported.

For-profit companies can have a much more defined target audience because they typically offer a value-adding product or service. Non-profits must reach a more diverse audience which can include volunteers, donors, corporate sponsors, and the general public. They typically advocate a message about a cause with a call to action. This may be combined with offering a product or service, although without the profit goal.

The executive leadership of a profit-driven company is typically quite clear. There are directors and shareholders.  Leadership responsibilities are distributed between the directors. The shareholders appoint the board of directors. Shareholders have a stake in the financial success of the organization, which often results in incentives such as bonuses and profit sharing. Non-profit organizations tend to be led and directed by a board of directors who guide the future of the organization without possessing direct financial ownership.

Profit-driven companies are usually pay Company Income Tax (CIT), whereas non-profit companies and organizations are exempt from taxes in terms of section 18A of the Income Tax Act 58 of 1962. The latter is not automatic. To qualify for full or partial exemption, the NPO or NPC must register as a Public Benefit Organisation and get approval from the Tax Exemption Unit (TEU).The tax exempt status of a non-profit organization often means that donors are able to get tax deductions on their donations. A taxpayer making a bona fide donation in cash or of property in kind to a section 18A-approved organisation, is entitled to a deduction from taxable income if the donation. The amount of donations which may qualify for a tax deduction is limited.  

In terms of the human resource contingent, the staff of a for-profit enterprise will comprise paid employees and interns whereas a non-profit typically relies on volunteer staff.  The volunteer staff can be paid for their work.

The basic organizational difference between for-profit and non-profit is that employee performance is motivated by profit-making and other financial incentive based on key performance indicators, whereas non-profits are community-orientated with little financial incentive.

Personality Liability Companies

This is typically used by professional services providers, namely, chartered accountants, lawyers, engineers, and health care professionals. These companies are established in terms of the Companies Act, and further regulated by legislation relating to each profession, as well as by the rules of professional associations (for example, the Health Professions Council of South Africa).

A personal liability model essentially means that the business and the person or people involved in it are separate legal entities. While the directors can be held personally liable for the debts and actions of the enterprise, the shareholders liability is limited.  The directors’ liability is limited to the company’s contractual debts and liabilities incurred during each director’s term of office. Any debts or liabilities not emanating out of a contractual relationship with the company, will not be imputed to the directors and former directors of the company. This is so even if these debts and liabilities were incurred during the directors’ terms of office.

 The requirements for establishment do not need to be expensive, but is certainly more costly than setting up a sole proprietorship. The legal regulations for personal liability companies are onerous but it creates more certainty and establishes credibility. The lifespan is unlimited, however, where someone dies, the company has to be dissolved and re-formed.

Just as a garment takes time to make and requires a few fittings to get it just right, so the decision-making process for which type of enterprise to use can be just as methodical. To get the right fit you should look at purpose, types of funding, audience, leadership, organizational culture, taxation, and staff. The time taken will ensure the best custom fit and hopefully be something that is treasured for life.

Lisa Valene Thomas – 5 August 2021

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