Congrats! You’ve taken the big leap and have started a business this year. This question now arises whether you register a company or not. There are many different forms through which you can run a business and its important to find the one that is the right fit for you. They have different consequences for tax, risk management and the ease with which you can run it. We will be covering the different types of business forms to help you make the right choice.
What is a Sole Proprietor?
- A Sole Prop means you are running the business as yourself. On the plus side there is very little red tape and you don’t have to incur costs setting up a company;
- One of the con’s is that you have no separation between the debts of the business and your personal debts because there is no separate legal person through which you are running your business such as a company. So, if you own properties like a home or cars they will be at risk if you are unable to pay your business debts. You can mitigate this risk by holding your properties through an asset company or trust. We can help you with this.
- Running your business as a sole prop won’t be a good idea if your business is high risk (i.e. there’s a high chance that someone will sue you) although you can mitigate some risk by getting proper insurance like public indemnity, product liability or professional liability insurance depending on what goods or services you are offering.
- You might also want to avoid running as a sole prop if you routinely incur debt to run your business for example you buy trading stock.
- You should also be careful of running as a sole prop if you are married in community of property as your business debts will also bind your partner. If you are married out of community of property and your main assets are in your partners name this becomes a more attractive business form.
- Running as a sole proprietor is perfect for low risk service businesses such as freelancer designers or copyrighters.
- Depending on your industry you may be prohibited from running as a sole prop or if you provide work to specific corporates or on tender the requirements of such corporate might be that you have a registered company to qualify as a supplier. The requirements of your industry and likely customers should be considered;
- Running a business as a registered company is sometimes viewed as more serious or legitimate than a sole proprietor. You should gauge whether this will have an impact on your brand or client perception
- You can be certified or obtain an affidavit for B-B BEE purposes while running as a sole prop.
- Running as a sole prop means you often pay less tax then if you registered a company. Remember that a company will pay tax on its earnings at a rate of 28% then you will be taxed on your salary as an employee of the company (PAYE) or drawings as a director on the personal income tax scale of between 18-41% depending on your earnings or sometimes at the dividend tax rate of 15%. Using real world examples if you make R1000.00 turnover in your company it will be taxed R280.00. If you draw the remaining R720.00 as your salary at your personal income tax rate of 35% you will have R468.00 in your pocket. However, if you are a sole prop and you earn R1000.00 you will get taxed at your personal income tax rate of, say 35%, and you will have R 650.00 in your pocket. If there is no need from a risk management, legislative, branding or client perspective to run as a company this means you are being taxed at a much heavier rate than you need to be.
We hope this article has helped you think through what business form will be best for you.