Most important thing to know when starting a business
When setting up your business, deciding between a sole proprietorship, partnership, or private company is crucial, each carrying distinct pros and cons. Picking the right structure for your venture demands careful evaluation.
Factors to weigh include: Key features
If you’re planning a one-person business, you may consider running a sole proprietorship, which is the simplest form of business entity and involves very little administration – although note that a sole proprietorship is not a legal entity and does not exist separately from the owner.
In the case of multiple business partners, the available options include setting up a partnership (or joint venture) or registering a private company. What is important to appreciate is that personal liability in each structure varies, which we will deal with in greater detail below.
Trading name
As a sole proprietor, you’re free to choose any name for your business without any registration requirements. Similarly, there are no registration requirements for a partnership, and partners remain free to choose a trading name.
On the other hand, setting up a private company requires that your entity is registered with the Companies and Intellectual Property Commission (CIPC), which will first need to approve the chosen name for your business.
Personal liability considerations
If running a sole proprietorship, keep in mind that you and the business are one and the same person, and you will be legally liable for all the debt of the business. Similarly, a partnership is not a separate legal entity, and because the partners have unlimited liability, they may be held personally liable for the debts in the business.
Business registration
A notable advantage of setting up a sole proprietorship is that there are very few setup requirements.
While there is no need to register your business with the CIPC, you will need to register with the South African Revenue Service (Sars) for tax purposes.
Once registered as a taxpayer, you’ll simply need to file your tax returns as usual, with any business income being declared as part of your personal income tax.
Planning for growth
A significant advantage of setting up a private company is that this type of entity is perfect for the future growth of the business. If you’re the only shareholder in your private company, it is relatively easy to bring on additional shareholders without having to change the structure of the business.
On the other hand, if you initially set up as a sole trader and then decide to bring in additional resources, you will likely need to change the structure of the business to accommodate the growth.
Financial reporting
Sole proprietors and partnerships have no obligation to prepare financials for the business.
However, legislation requires that all private companies submit financial statements prepared by an accounting officer to Sars.
Depending on the company’s turnover and public interest score, audited financial statements may need to be prepared and submitted.
Tax and VAT
A private company, as a separate legal entity, must be registered as a taxpayer in its own right, and all business income and expenses must be declared on the company’s tax returns. Company profits will be taxed at a flat rate of 27% (as of 1 April, 2023), and any dividends declared will be taxed at a rate of 20% on distributions made to shareholders.
As sole proprietorships and partnerships are not separate legal entities, the owners are personally responsible for all business and personal taxes, which must be declared on their personal tax returns, bearing in mind that each partner in a partnership will be taxed on their share of the partnership profits.