Have you chosen the best legal and tax structure for your business?

You’ve finally got everything ready to open the small business you’ve always dreamed of.  Or you’ve been trading for a while and are wondering whether your current business structure is working for you.  At some point you’ll wonder, should I go through the ‘admin’ of registering my business as a separate legal entity (Company or purchasing an already registered CC), or should I simply leave the business in my own name (sole proprietor) or as a partnership?  There are a number of options available for the legal structure and tax structure of your business.

While the new Companies Act (2008) does not allow for the registration of new Close Corporations (although currently registered CC’s can continue to operate), the private company is now more cost effective for new businesses to register and operate. Sole proprietorship and partnerships are still options available to small businesses if separate juristic person and limited liability are not required for your business. The less common structures available are trusts and co-operatives that still have their place, but are not usually the best structure for operating a Small to Medium enterprise (SME).

As in life, each option has its pros and cons.  There is no ‘right’ answer for everyone, only what is most right for you and your business. This article is not a comprehensive list of all requirements and issues, but introduces you, the reader to some of the more pertinent matters to consider.

A sole proprietorship and partnership have the benefit of requiring no registration from your side other than your own personal income tax registration (although there are now requirements for name registration and submission of information to comply with the Public Access to Information act – PAIA).  No audits and no financial statements required.   The business is not separate from you and your partners, that is, you are the business.  There is no ‘limited’ liability for you the entrepreneur – if things go south your personal assets will be on the line.

A way to protect your personal assets is to register your business as a private company (or purchase a shelf Close Corporation).  This will require registration with the CIPC (the government body that regulates companies) as well as SARS and a plethora of other administrative costs to run the business.  ‘Admin’ and cost, certainly, but it could be worth it.  You would register a company and appoint yourself as a director (if you are wanting to be involved with management), and in the event of liquidation be entitled to what’s left of the company’s assets after paying its liabilities. This being said, there are multiple provisions in the Companies Act (and the Close Corporations Act) that add potential liabilities to directors who do not comply with the relevant legislation or trade recklessly. Further separation of your personal assets from business creditors can be obtained by utilising trusts in the ownership structure. Trust structures are costly and require expert advice to setup and administer correctly.

Let’s consider tax.  You’ve worked hard to get where you are, and you certainly don’t want to see profits disappear unnecessarily into SARS’ coffers.  Believe it or not, Government doesn’t want this either, as there has been a policy shift to growing the SME business in South Africa as a means of addressing the high levels of unemployment in SA.

For this reason the ‘Small Business Corporation’ (SBC) was created.   If your business qualifies as a SBC (and note, there are a number of requirements you’ll have to meet first), it will be entitled to some generous deductions and much lower rates of tax.

Another option for the smaller business is to register as a Micro Enterprise for turnover tax.  As the name suggestions, your business could potentially be taxed on turnover, not taxable income as defined in the Income Tax Act (and which often requires a complicated calculation!).  The normal business has to complete and administer a multitude of different tax registrations and returns, from VAT to provisional tax and dividend tax, the requirements for the micro enterprise are much simpler and less onerous   Again, certain requirements need to be met, but you could potentially save yourself a lot of hassle (and moola!) by registering for this type of tax. The last point on the micro enterprise is that you do not have to be a company or CC to register – it is open for sole traders and partnerships as well.

If you decide not to register for turnover tax or as a company, profits from your business would form part of your own personal taxable income.  This income would therefore be taxed on the personal income tax rate with the ascending tax tables. This can be either beneficial or to your detriment depending on the level of income you are earning. The main issue for not operating in a seperrate legal entity (company) is that you do not have limited liability and it is often not as easy to sell your business without it being registered in a separate legal entity.

As you can see there are various factors to consider before you can arrive at the right choice.  If you are not sure about which structure is best for you, be sure to speak to someone qualified to offer good advice as well as doing some research for yourself. Knowledge truly is power in the complex world of business, build relationships with experts who will advise you but also those that will teach you.

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