Ladies first: empowering your SME to succeed

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 3 June 2008

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Are you a woman with an incredible idea on which you want to base your own business? According to Ursula Van Eck, partner: BDO Spencer Steward, your time is now. It's all about how you empower yourself to succeed…

If you're thinking of starting your own business, you could probably already be profiled as “tenacious”, “courageous” and someone “who loves a challenge”. If you're a woman thinking of starting your own business, you're probably all of the above – to the power of a hundred. And, while this is a very exciting time for any woman entrepreneur in our country, it's also a crucial time for those lady entrepreneurs among us to empower themselves with the knowledge and skills they need to build and sustain their businesses. But it takes more than just a great idea to make a business work. Understanding what you want and putting together a plan on how to get there is the cornerstone of your “business empowerment”.

What you need to understand from the outset is that the first two years of your SME's existence are critical to its long-term survival. This makes it vital that you lay a long-term and strategic foundation on which your business can grow. To help you mitigate your risk – and make you aware of what you stand to lose - you also need to appreciate the financial and tax implications of your decisions and actions.

By understanding how the structure of your company affects your personal financial position and tax obligations, you will empower yourself to make decisions that don't limit or stymie its potential growth. When doing your initial SME research, you'll find that you can structure your company in a number of ways:

Sole proprietorships

In a sole proprietorship you are the sole owner of the business. The most important thing you need to know about this type of business is that you are personally liable for your business' debts. This means that your personal assets will not be protected should your business fail and owe money.

Although it's not necessary to register a sole propriety or partnership, you will need to obtain a bank account in order to reserve a name for your business. In terms of tax requirements, all profits derived from your business are taxable and sole proprietors are subject to the same tax regulations, VAT and levies as other legal entities.

A sole proprietorship is the cheapest and easiest type of business to start up and run. This makes it ideal for very small, uncomplicated SMEs.

Partnerships

A partnership is a business that has between two and 20 partners. The partners own the business together which makes a comprehensive written agreement essential. Because the agreement needs to address sensitive issues about how you will all share in the profits, and what will happen to the assets of the business when the partnership comes to an end, it's best to draw up an agreement with the help of a suitably experienced lawyer, when entering into a partnership. This will also ensure that your contract is valid.

As with a sole proprietorship, partners are personally liable for the business' debts – even if they are debts incurred by other partners. Partnerships are also required to maintain appropriate books of account with respect to individual partnership capital and income accounts, and file the necessary statutory tax returns. However, the decision to draw up financial statements and have an annual audit will rest with the partners and such a clause should be contained in the partnership agreement.

Although partnerships are fairly cheap to set up, trust is critical to a partnership: an irresponsible partner can cause the business to fail and incur debts which will have negative consequences for all involved.

Close corporations

A close corporation (CC) is like a company, only smaller and less complicated to run. It is established by “members” – people who own and manage the business. A CC cannot have more than ten members. When creating a CC you need to register it with the Registrar of Companies. There are several legal and accounting firms who specialise in selling shelf CCs and their services would usually include drafting the “founding statement” and necessary registrations.

The main advantage a CC offers its members is no personal liability. The assets and debts of the business remain separate to those of the members.

A CC has far more accounting and tax obligations than that of a sole proprietorship or partnership. A CC is required by law to appoint a suitably qualified accounting officer and to keep such accounting records as are necessary to fairly present the state of affairs and to explain the transactions and financial position of the business of the corporation. In addition, the members of a CC are required to ensure that financial statements are prepared annually. Depending on the skills of the members of your CC, this may require that you engage the services of a registered accountant to keep up-to-date financial records of all business transactions, submit the necessary tax returns, prepare annual financial statements and so forth. When you first approach an accountant to enquire about registering your CC, make sure they explain all of these requirements to you.

Private Companies (Pty's)

If there are more than ten but less than 50 people involved in creating your business, you may want to consider forming a company. Your company will initially comprise shareholders and directors. Shareholders put the money into the business – they own it and finance it. Directors on the other hand manage the business. Shareholders may act as the company's directors or may employ other people to do this on their behalf.

As with CCs, companies are separate legal entities from the shareholders and directors: the assets and debts of the business thus belong to the company. Any liabilities are therefore limited to the company i.e. shareholders and directors will be exposed to the extent they have put funds into the business.

Companies can be complicated to manage and run and they are also more expensive to register. In addition to maintaining proper accounting records, filing statutory tax returns and ensuring annual financial statements are prepared (as for CCs), there are further regulatory and administrative requirements that can prove very challenging to meet.

Evaluate your options

There are advantages and disadvantages to each of the discussed options depending on your individual needs and aspirations. An incorrect choice can have unforeseen and expensive consequences.

When it comes to creating your own business then, the best possible advice I can give to all women entrepreneurs is know your options and the corresponding financial risks. Understand the advantages and challenges, and know how these can affect you personally. By planning and being prepared for all eventualities, you'll thereby ensure that you give your business the best possible chance of success. Empower yourself with necessary financial and regulatory knowledge – and you'll soon discover that the best possible source of your business' enablement is yourself.

Disclaimer: Please note that this article is at least 12 months old.
Any information herein was accurate when published on 3 June 2008