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How to Choose the Appropriate Legal Entity

If starting a business on your own in 2023 is something you’ve always wanted to do, consider these factors first:

  1. Am I a businessperson? You’ve got a fantastic business idea, and you can’t wait to start it up. Success and fortune are calling. But hold on, are you really cut out for the hustle and bustle of entrepreneurship? It can be extremely lucrative, not only in terms of money but also in terms of lifestyle and overall well-being. But it also entails a great deal more risk than the traditional “9 to 5 employee” alternative, so carefully consider your options.
  2. What’s my strategy? Without a strategy, you navigate through dangerous, shark-infested waters without a rudder. Although there is a lot of advice available to assist you chart your route, start-up failure rates are high.
  3. Which legal organization ought I to use for business? Avoid making the beginner error of setting sail in any old boat. Starting in the wrong entity and having to switch in the middle of operations will result in a lot of needless expenditure, hassle, and risk. Instead, make long-term plans. Consider where you want your company to be in five or ten years, its size, your exit strategy, and other factors.

So what options do you have?

You have four primary choices. –

  1. A single-person business (a “sole trader”). You are the company, conducting business for your own gain or loss, possibly using a trading name like “Syd Smith trading as “Syds Plumbing”.”
  2. A group of two to twenty people or entities who pool their resources to operate a trade, business, or profession in exchange for a cut of the earnings.
  3. A privately held corporation (“Pty Ltd”) with any quantity of stockholders. Directors have control over and are in charge of.
  4. A trust (number of trustees and beneficiaries not restricted). There are various types of trust, with trustees controlling and managing trust assets and/or trading for the benefit of beneficiaries.

Noting that there are other specialized types of entities available to, for example, non-profit organizations (charities, etc.), professionals (lawyers, accountants, doctors, etc.), and the like, it should be noted that you might be advised to combine one or more of these entities in a corporate structure.

Each’s advantages and disadvantages

For a description of the benefits and drawbacks of each of these choices, look at the example table below.

Remember the effects on taxes and estate planning!

Briefly stated:

  • Estate planning: You might be encouraged to utilize trusts and corporations to transfer money to future generations in a way that is both tax-efficient and practicable, as well as to shield your assets from creditors both now and after you pass away. Both corporations and trusts are “perpetual” in the sense that they endure changes in directors or trustees (resignation, removal, retirement, insolvency, death, etc.), with the potential to save money on estate taxes over multiple generations and avoid the expenses and delays associated with administering a decedent’s estate.
  • Tax efficiency: Partnerships and sole proprietorships are taxed at individual rates; trusts other than special trusts are taxed at a flat rate of 45%; businesses are taxed at a flat rate of 27% (down from 28% starting with assessments ending on March 31, 2023), plus 20% dividends tax when profits are distributed. There are a number of other considerations to make in this case, including things like Capital Gains. Tax inclusion rates, exclusions, exemptions, small company benefits, and the “trust conduit concept” are all very important when determining whether you would be better off paying taxes as an individual or through a corporate or trust structure.

Take that advise from a professional!

    Remember the effects on taxes and estate planning!

    Briefly stated:

    • Estate planning: You might be encouraged to utilize trusts and corporations to transfer money to future generations in a way that is both tax-efficient and practicable, as well as to shield your assets from creditors both now and after you pass away. Both corporations and trusts are “perpetual” in the sense that they endure changes in directors or trustees (resignation, removal, retirement, insolvency, death, etc.), with the potential to save money on estate taxes over multiple generations and avoid the expenses and delays associated with administering a decedent’s estate.
    • Tax efficiency: Partnerships and sole proprietorships are taxed at individual rates; trusts other than special trusts are taxed at a flat rate of 45%; businesses are taxed at a flat rate of 27% (down from 28% starting with assessments ending on March 31, 2023), plus 20% dividends tax when profits are distributed. There are a number of other considerations to make in this case, including things like Capital Gains. Tax inclusion rates, exclusions, exemptions, small company benefits, and the “trust conduit concept” are all very important when determining whether you would be better off paying taxes as an individual or through a corporate or trust structure.

    Take that advise from a professional!