Business Structures and Legal Frameworks
What you must understand
Compare the main structures: sole trader, partnership, private company (Pty Ltd), public company (Ltd), and trust/co-operative where relevant. For each, know: ownership and control, liability, ability to raise capital, continuity, taxation, disclosure obligations and cost of establishment. Key concepts: separate legal entity, limited versus unlimited liability, perpetual succession, shareholders versus directors, and the corporate veil. Legal frameworks include the corporations law governing registration and directors' duties, contract law, consumer protection, workplace health and safety, environmental regulation and fair trading. Directors owe duties of care, good faith and avoidance of insolvent trading.
Traps in questions
- Saying a company has "limited liability" for its owners without noting it is the company that is liable and shareholders risk only unpaid capital.
- Confusing a proprietary company's restrictions (no public fundraising, limited shareholders) with a public company.
- Assuming partnership profits are always equal - the agreement governs unless absent.
- Forgetting that incorporation brings compliance costs and public disclosure, not just benefits.
- Recommending a structure without weighing the owner's goals (control, capital, risk, exit).
Rule of thumb
Match structure to risk, capital need and control preference. High risk plus growth capital points to a company; low risk, low capital and maximum control points to a sole trader.
Worked example
Two friends plan a high-risk manufacturing venture needing $500,000. As a partnership they face unlimited joint and several liability and limited capital. A proprietary company limits their personal exposure, allows share issuance to investors and continues beyond their involvement, but adds registration, reporting and director duties. Recommendation: Pty Ltd, with a shareholders' agreement covering exit and deadlock.