This guide contains information about the tax laws that apply to businesses. It describes the four major forms of business organisations and explains the tax responsibilities of each.
This first edition of ‘Tax Guide for Small Business’ is divided into three parts. The first part contains general information on business organisation and registration. Part II discusses various aspects of record-keeping, including an explanation of net profit or loss. This helps to illustrate the specific tax considerations for each of the flour different business organisations. Part III contains an explanation of income tax and some of the other taxes you may have to pay in addition to income tax.
Part I
Initial considerations when organising a business
Once you have decided to start a business you must decide what type of business entity to use. There are legal and tax considerations that will enter into this decision the legal considerations are beyond the scope of this guide. However, an important element in your decision will be the tax consequences of each type of entity.
Types of business organisations
Sole Proprietorship:
A sole proprietorship is a business that is owned by one person. This is the simplest form of business organisation. The business has no existence apart from the owner who is called the proprietor. Only the proprietor has the authority to make decisions for the business. The proprietor assumes the risks of the business to the extent of all his or her assets whether used in the business or personally owned.
Partnerships:
A partnership is a relationship existing between two or more persons who join together to carry on a trade, business or profession. Each person contributes money, property, labour or skills, and each expects to share in the profits and losses of the business. It is like a sole proprietorship except that a group of owners replaces the individual owner. The number of persons who may join in a partnership agreement is limited to twenty. Like the sole proprietorship, the partnership has advantages and disadvantages.
Close Corporation:
A close corporation is much the same as a private company. It is a legal entity with its own legal personality and perpetual succession. The owners of the close corporation are the members. Members do not hold shares but have an interest in the close corporation. The interest is expressed as a percentage. Memberships generally speaking are restricted to natural persons. The maximum number of members is 10.
Private Company:
A company is treated by law as a single legal entity. It has a life separate and apart from its owners with rights and duties of its own. The owners of a private company are the shareholders. The managers of a private company may or may not be shareholders. The maximum number of shareholders is restricted to fifty.
Some Advantages and Disadvantages of the Four Types of Business Organisations
| Advantages | |||
| Sole Proprietorship | Partnership | Close Corporation | Private Company |
| 1. Simple to organise. | 1. Easy to organise. | 1. Easy to organise. | 1. Perpetual life. |
| 2. Owner free to make decisions. | 2. Greater financial strength | 2. Perpetual life. | 2. Limited to transfer ownership. |
| 3. Minimum of legal requirements. skills. | 3. Combined managerial skills | 3. Limited liability. | 3. Easy to transfer ownership. |
| 4. Owner receives all profits | 4. Definite legal status. | 4. Easy to transfer ownership. | 4. Maintenance of management. |
| 5. Easy to discontinue. | 5. Partners have personal interest. | 5. Fewer legal requirements that a private company | 5. Adaptable to small and large businesses. |
| Disadvantages | |||
| 1. Unlimited liability of owner. | 1. Unlimited liability of partners. | 1. Special taxation rates. | 1. Special taxation rates. |
| 2. Limited ability to raise capital. | 2. Authority for decisions divided. | 2. Maximum of ten members. | 2. More difficult and expensive to organise. |
| 3. Limited skills. | 3. More legal requirements than sole proprietorship or partnership. | 3. Subject to many legal requirements. |
In order to understand the tax consequences of each of the four business organisations, you will need to understand the basic steps for determining your business’ profit or loss. This is explained in the blog.
