Having recently set up my own legal and business consulting business in South Africa, I am well aware of the many hurdles and pitfalls to running your own business. I work with a range of businesses from large corporations to small businesses but have a real passion for the small start-ups with big dreams who are scrambling to get going. It’s a rollercoaster of a time for start-ups and it’s rewarding to bring a real value-add to my clients with advice that extends beyond the legal realm and into business consulting.
A critical first step for any new business is deciding on the form of business ownership and structure. There a few options available for anyone wanting to start their own business in South Africa from sole proprietorship or sole trader, to the partnership, personal liability company (usually for professionals such as attorneys to accountants) or private company. For one-person start-ups in South Africa, the two main options are: (1) sole proprietorship or (2) private company.
Often the choice between these two structures can come down to a question of tax. This consideration leads many start-ups to choose sole proprietorship because instead of taxing the business, there is a look-through tax liability directly to the individual. This tax position is particularly favourable for a business that generates smaller profits because the individual will be taxed on a lower sliding scale than the standard company tax (currently at 28%). The sole proprietorship is also not liable for any tax on dividends (currently at 20%).
In addition to the tax consideration, a sole proprietorship does not have any formal registration requirements and it is less administratively burdensome. And while a sole proprietorship may be appropriate for a one-person business operation that intends to remain like that, there are other factors to consider before deciding on this route.
A private company has a separate legal personality from its shareholders, offering limited liability, which means that the company and not the shareholders of that company, is liable for its own debts. Other benefits that a company offers include the potential for a business to expand by hiring employees in the businesses own name or taking on new partners as directors and shareholders. It is also easier to offer up shares in a company to attract potential investors. A company structure establishes the longevity of a separate legal entity and builds up a brand associated with a company and not with an individual person. This can create franchise opportunities for a business and provides an individual with a useful exit strategy should they wish to sell the business in the future.
My advice is to review your business plan and consider other factors than only the tax considerations when forming your start-up. The key differences between a sole proprietorship and a private company are summarised in the table below.
|Sole Proprietor||Private Company|
|Legal entity||Owner and business are the same legal entity||Owner is a separate legal entity|
|Liability||The sole proprietor is personally liable for all of the business’s debts.||The shareholders have limited liability meaning if the company is insolvent, the creditors cannot claim from the shareholders in their personal capacity|
|Business registration||No legal requirement to register||Must register with Companies and Intellectual Property Commission|
|Tax registration||Owner to be registered with SARS as a provisional tax payer and pay tax twice a year on estimated business profits||Company to be registered with SARS as a provisional tax payer and pay tax twice a year on estimated business profits|
|Tax rate||Owner is taxed on profits at the applicable progressive Individual income tax rates||Company profits are taxed at flat rate of 28% (unless Company qualifies for an exemption)|
|Dividend tax||Not subject to dividend tax||Subject to a 20% dividend tax rate paid on distribution to shareholders|
|VAT||Must register as a VAT vendor when turnover greater than R1 million for a twelve-month period||Must register as a VAT vendor when turnover greater than R1 million for a twelve-month period|
|Financial statements||Not required||Financial Statements need to be prepared by accounting officer subject to some exceptions.|