Do Business Well

The simplest and easiest way for the very small business to operate is as a sole trader (if you are a one-person outfit), or, if you are going into business with a friend, as a partnership. The only difference between the two is that as a sole trader you conduct your business in your personal capacity and have sole responsibility, while partners in a business share equal responsibility. There are pros and cons to either of these operations, and you should be fully aware of them before you make a final decision on the legal structure of your business.

Advantages (Sole trader/partnership)

No formalities are required in setting up either a sole trader operation or a partnership, except to register for taxation. You simply have to state on your stationery and your bank account: ‘Betty Smith, trading as Jelly Farm Bottled Preserves’, or whatever.

In the case of a partnership, a written agreement is not essential as a legal formality. Nevertheless, you should think twice about going into business with a friend without formalising a partnership agreement. Many a business partnership which started off as a close friendship comes apart at the seams because of disagreements and disputes.

A partnership agreement should specify clearly the rights and duties of the individual partners and ideally should be drawn up by an attorney to cover the formation of the partnership, profit-sharing arrangements, salaries (if any) to individual partners, banking arrangements and procedure should a change of partners or dissolution of the partnership Occur.

Should you wish to change your partnership to a ‘close corporation’ at a later stage, or to a limited company, the procedure is relatively straightforward.

Any losses that are incurred in the business can be set off against other income in the preparation of your annual tax assessment.

Disadvantages (Sole trader/partnership)

The liability of sole traders or partners is total. This means that you are personally responsible for the debts incurred in a sole trader operation, and in the case of a partnership, all the partners are individually and collectively liable for any debts of the partnership.

What this means, in practice, is that if you run up amazing debts in the name and within the scope of the business, but don’t get out there and make the sales to cover them, until you end up with no cash, no assets and a herd of creditors hammering at the door, anything that has your name on it — your car, your furniture, even your house — may be lost to the people you owe. (If you are married in community of property, the property of your spouse carries the same risk.)

That may sound rather extreme, but it’s meant to be sobering enough to make you consider very carefully how you set things up, firstly, and secondly how you run your operation.

Sole traders and partners in a business are liable in the normal way for income tax. This means that profits are perceived as income and are treated in the usual way — taxed as such, and added to your husband’s income if you are married. Although you may claim for expenses if you are running the business or ‘earning your income‘ from home, it may mean you will be paying more tax in the end.

A tax consultant or accountant is the best person to ask for an opinion on this one — take him your business plan with all your projected figures and details of your normal tax assessment figures when you go for a consultation.

Technically, a sole proprietorship or a partnership ‘dies’ when its owner or one of its partners dies, which may lead to difficulty in transferring your interest on the death of a partner. Prior agreement can be made, however, to overcome any difficulties.

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