In this final installment of "HOW TO DECLARE A COMPANY INSOLVENT," we will be looking at the rules and regulations stipulated in the Insolvency Act when declaring bankruptcy of a company operating as a Sole proprietor.
What is the difference between a Closed Corporation (CC), a Privately owned company (PTY LTD), and a Sole Proprietor?
One of the major differences is that:
A CC and a PTY LTD company are registered at the Companies and Intellectual Property Commission (CIPC).
The second major difference is that:
Since both CC's and PTY LTD corporations are registered with CIPC, they are separate legal entities.
If the director(s), shareholder(s), or member(s) don't enter into surety agreements for any debt these entities incur, the debt belongs to the business itself.
No director(s), shareholder(s), or member(s) will be liable for any of these company debts.
No debt can be transferred to:
The director(s), shareholder(s), and member(s) in their personal capacity without a personal surety agreement between the director(s), shareholder(s), and member(s) of a CC and/or PTY LTD and the creditor in question.
Starting a Business
Therefore, if you're planning to start a business, my advice would be to register the company with CIPC and refrain from personally signing sureties for any debts on behalf of the company.
In May 2011, the Companies Act changed.
This change involved phasing out CCs. Therefore, if you’ve registered a company at CIPC after May 2011, you will be a director on a PTY LTD, also known as a private company.
CC’s Converted to PTY LTD since May 2011
Any CC’s still in existence are still registered at CIPC; however, they've been converted to PTY LTD’s (private companies).
What is a Sole Proprietor Business?The definition of a Sole Proprietor as described by Investopedia:
‘A sole proprietorship is an unincorporated business with one owner. There is no legal separation between the company and the owner, who receives all profits but is liable for all debts and losses.’
A Sole Proprietor is a business that is not registered at CIPC, and therefore the owner of this company is running this business in his personal capacity.
The owner and the business are one legal entity, and therefore any debt in the Sole Proprietor Company is also the personal debt of the owner of the company.
If you are the owner of a Sole Proprietor your personal debt and business debt cannot be separated and form part of one estate. Your personal estate.
Therefore, when declaring bankruptcy of a Sole Proprietor, the owner of the company will need to declare personal sequestration to declare the business bankrupt.
Once this decision is reached, the debt in the company as well as the owner(s) name will form part of the insolvent estate, and both the business and business owner will be declared bankrupt with one sequestration application.
Taking the above into consideration, declaring a sole proprietor insolvent can be detrimental to your personal financial affairs and your credit profile.
However, it can also be the preferred outcome, especially if you’re overindebted and struggling financially in your personal capacity as well.
