Is a business the same thing as a company?
One of the common problems or questions entrepreneurs face is whether so start a company in order to run a business. But hang on, what is the difference between a “business” and a “company”? Are they not the same thing? Well, no they are not and here follows an explanation on what each one is.
A business is what you do to make money or make a profit. So the act of selling some products or providing a service in return for payment is quite simply a business. You would need to repeat these actions on a regular basis for it to be considered a business, because if you sell your house for example, that is not a business as you only do it a few times. If however you sold houses regular to earn income and make a profit, then that would be a business.
The guy on the side of the road offering his services as a painter each weekend is running a business. The shop selling cold drinks down the road is a business. Large retail stores such as Makro, Amazon and Checkers are also businesses.
The exception is when someone is selling their time to one company in order to earn income. Then you are known as an employee rather than a business. But if you sold your time to to a number of businesses like a consultant does, then you have a business.
Pty Ltd, CCs, sole proprietors and partnerships are all types of businesses.
A company is a made up (created) “person” or entity, that is used to run a business. So what you would do is head off to the CIPC and register a company. The CIPC then creates a new company for you with a name and its own unique identity number called a company registration number. Now you have a new legal entity that you own. This new thing (company) you have created can now own property, buy products, sell products, pay tax, make a profit, enter into contracts …. pretty much anything that a real person can do.
If you don’t create a company, but run a business anyway, using your own bank account, then you have what is called a sole proprietor. It is perfectly legal and acceptable to have a business as a sole proprietor. So essentially a company is a structure that is used to run certain types of businesses. Other businesses can be run as sole proprietors, partnerships or non profits. There are still some structures called close corporations (CC) but these cannot be created anymore so only those left in existence continue to operate.
Reasons to have a company.
Why would someone bother to register a company if it does exactly what a person can do? Well, there are some advantages .
Firstly, if there are a number of people who want to be involved in a business idea and to make profits, then having a company is a very convenient way of being able to run a business where several people can share in the benefits. If you did not have a company, then who’s bank account would you use for customers to pay into? How would you decide which of the group should pay for a particular expense? It would become complicated very quickly.
So instead a company is created and all the business transactions are done through the company bank accounts. Each of the people who invested in the company (called shareholders), can then take a share of the profits from the company at the end of the year, but all the many transactions and deals are done using the name of the company and not the name of an individual person.
Secondly, continuity if very important. If you had four entrepreneurs starting a business, and you decided to run the business through one of their accounts and he signed all the deals, then what happens when he dies? Who gets the assets? Who gets the money left in the bank account? What happens to the contracts that were in place? It becomes very complicated.
If you have a company structure, then the company will continue to operate if one of the four shareholders dies. The other three can continue to run the business as usual, and either a fourth person can but the shares of the deceased person or the three existing shareholders can take over his shares.
A third reason is the ability to buy and sell your ownership of the business. If you have a sole proprietor business where you run the business using your name and your bank account, then it becomes very difficult for a buyer to figure out what belongs to you personally and what belongs to the business you run. If you want to get an investor to buy part of your business, then how can they do that if you are the business? With a company, they can by a percentage of the company and so own that same percentage of the business.
A fourth common reason is what is known as asset protection. Running a business can be quite a risky task. Businesses can fail for reasons beyond your control. Major suppliers can discontinue product lines, natural disasters can destroy your assets, thieves can steal products or money, major customers can move to other suppliers on a whim. If you have debts when a business fails and you are a sole proprietor then you are responsible for all those debts personally. So if you still have two years left on your lease, you have to pay the rent for another two years even if your business is no longer trading.
If you have a company, then all the assets of the company can be sold to pay off the debts. If there are still debts left over at this stage, creditors can’t generally come after the shareholders. A word of caution here though. There are several ways in which this is not the case. The two most common are when you sign a document called a personal surety which essentially says that you will personally pay any debts that the company can’t – and this little agreement is often sneaked into account agreements when you open a 30 day account with a supplier or take on bank dent. The other is if you trade recklessly or if the company debts exceed its assets during the normal course of business. Then directors may become personally liable for these debts.
Two big reasons to consider a company for your business based on this separation of liability aspect is if you register for VAT and if you decide to employ staff. The VAT number is not transferable and has a significant administrative burden that you don’t really want as an individual. Becoming an employer is a huge commitment in South Africa, and when times get hard, you don’t want to lose your house in order to pay retrenchment packages.
Summary of business or company
So in summary, a company is structure used to run a business. Not all businesses need to be run using a company structure, but it is very common to do so.
Your next question would most likely be – should I register a company for my business?