Companies? LLC? Sole-proprietorship? Where to begin...
Disclaimer: understandably the usual advice stands "when you have a product people are willing to pay for you can start thinking of this", but it is a good thing to understand and plan for regardless so you can be prepared when you eventually have that.
So! Something I have been deliberating over and considering for a year or so now is what model best suits a game dev startup company in South Africa?
The way I understand what I have read is the best thing to do is start up a company with some form of limited liability (LLC in the US) and grow from there, but in practice our laws governing companies and their creation are very much different.
For companies themselves:
A) What type of company did you form?
B ) What did you choose your type of company?
C) Would you stick to your choice if you started over? (yes/no) and why?
For people considering starting up:
1) What company type are you considering and why?
There may be different situations for different models for different situations, but I am genuinely curious how people feel in MGSA about these things.
It would be cool if Lex could offer some insight at some point too that would also be really cool.
So! Something I have been deliberating over and considering for a year or so now is what model best suits a game dev startup company in South Africa?
The way I understand what I have read is the best thing to do is start up a company with some form of limited liability (LLC in the US) and grow from there, but in practice our laws governing companies and their creation are very much different.
For companies themselves:
A) What type of company did you form?
B ) What did you choose your type of company?
C) Would you stick to your choice if you started over? (yes/no) and why?
For people considering starting up:
1) What company type are you considering and why?
There may be different situations for different models for different situations, but I am genuinely curious how people feel in MGSA about these things.
It would be cool if Lex could offer some insight at some point too that would also be really cool.
Comments
B: Starting a CC was cheap. I needed a company so I could easily pay other people that were working with me.
C: QCF is a PTY now. Being a CC for so long made sense, we only switched because Apple is annoying and doesn't understand what CCs are. Nick helped a ton.
Thanks for sharing, is being a PTY better in terms of liability or just control of the company in general?
There's not much difference between being a PTY and a CC from my perspective - we still have bank accounts as a company, we still pay people regularly, we still have the same accountant, we still pay tax. Yes, we had to think about some of the legal aspects of "what happens if" type questions, but that wasn't very hard.
I feel like people keep putting "starting a company" on a pedestal. It's really not difficult to do. All the things you need to turn into regular habits are things you should be doing anyway - like tracking your tax obligations. About the biggest difference is that money comes into a different bank account now, not your personal one - then you get options on what to do with it. Most of those options aren't useful.
Incorporate as a Private Company ((Pty) Ltd)
or
Sole Proprietorship.
Under the new Companies Act the Close Corporations Act was repealed, so you cannot register new CC's. You could still buy a shelf CC but I'm not convinced that this is a better option. There are other options (Public Company (Pty), Trust, Personal Liability Company (Inc.) and Partnership). I'll run through these and why you wouldn't use them before going onto the choice between CC, Pty and Sole Proprietor.
Public Companies means you need to be listed on the JSE, so you can sell your shares to the broader public, but the admin involved is huge. If you are not literally making billions of Rands you shouldn't do this. They are also expensive to setup and have a whole bunch of laws governing how you can sell your shares and you need to fulfill "public benefit" scores set out in the Companies Act.
A Trust is normally used as means to regulate your personal affairs. It has the benefit that the beneficiaries and trustees have limited liability, but it is not a good vehicle for business. Primarily because you will be paying a 40% tax on any income, which is significantly higher than the company tax. It is also difficult to setup properly, costly to maintain and a bitch to swap out trustees and beneficiaries, which means selling the business becomes difficult. Sometimes people will have a family trust own the shares in their CC or Pty, but again I' not convinced that it is that beneficial.
Personal Liability Companies are for specific professions that are not allowed to operate with limited liability (for example, Lawyers, Engineers, Doctors etc). This is essentially a Pty, but the shareholders or directors are personally liable for the debts and other liabilities of the company. For example if I ran off with a bunch of my clients money from my law firms trust account, the Directors of the firm could be sued personally to get that money back. Fairly easy to setup and maintain, but why the hell would you expose yourself to liability (one of the main reasons to incorporate in the first place)?
Partnership is when two or more people come together to work on a common goal, the partnership has a limited legal capacity, but the "partners" are all liable for the debts of the partnership (on the flip side they also share all the profits). Very easy to setup (you can verbally agree to a partnership and *poof* you are in one). However you still expose yourself to liability and it has no continuity, so when one of the partners leaves, the entire partnership dissolves and has to be reformed, which means new bank accounts, VAT numbers, Tax numbers etc. Which is a super ball ache (This recently happened at my law firm when one of the partners left).
There are also Noprofits, but you're making games to make money right? So this isn't an option.
Which leaves you with three choices: Pty, CC or Sole Proprietorship, so which do you choose?
Sole Propriotrships are the simplest to form. You already are one. You have no maintenance costs and you don't need to register with anyone. However you are personally liable for everything the company does, so if something goes wrong your creditors can attach your "personal" property (your house, car whatever) to claim back their debts. If things go really bad you could be declared insolvent, which means someone else will manage all your affairs until you are "rehabilitated". This meas you can't enter into any contracts, run a company or do a bunch of other stuff. International vendors recognise this though so getting registered on things like the iStore or Steam is simple.
Closed Corporations, prior to 2008 this was the way to incorporate a new business. Simple to do, simple to maintain and best of all, all the benefits of a Pty. Limited Liability and a distinct legal personality (so if its directors or shareholders change, it doesn't affect the actual status of the company). But then the "new" Companies Act came into effect and scrapped CC's. Existing CC's are still a thing, and we'll see them operate for sometime still, but ultimately they will either close or convert to Pty's. So you can't register a new CC if you wanted to, but you could buy a "shelf" CC. Given that you'll need to convert to a Pty in the future though, why would you do this? Rather just incorporate directly. CC's also have the problem that they are uniquely South African (though they have parallels to US and UK LLC's) so getting international vendors to register you can be.... difficult.
Lastly
Private Companies are the default legal vehicle for the majority of people in SA. Under the new companies act, if your company is small you can benefit from all the "ease" of a CC (such as no auditing requirements etc). They are now fairly cheap to incorporate and maintain (if you do it yourself) and have the possibility to really grow if you need it to. Pty's are internationally understood so dealing with international vendors is easy. Pty's also give you a sense of legitimacy that Sole Propritors don't. For example to access a lot of Government funding you need to be a Pty. Since these sorts of things also require you have been incorporated for a while, I recommend incorporating as soon as possible.
Unless cash flow is a serious problem there is no good reason not to incorporate. If cash flow is a problem, then you have bigger problems to worry about that whether to incorporate or not.