It’s important to understand the difference between a Sole Proprietorship and a registered company. If your business is not currently registered with the CIPC, then you are operating as either a Sole Proprietor or a Partnership. A Sole Proprietorship means that your business functions and exists in your own personal capacity, and not as a legal entity. A Partnership runs in much the same way, except that there are two or more people running the company, all of whom contribute to the business and share in the profits and losses. From a tax perspective, each partner will be taxed individually on their profit.
Registering your business could broaden your potential client and supplier base, because many customers and suppliers prefer to deal with a Private Company as opposed to an individual. Furthermore, being registered will allow you to pitch for business to larger corporates and government.
You may also be building your empire with the ultimate vision of selling it off and retiring to a tropical island. If this is the case, you need to build a company that will sell. And this can only be done if the business is officially registered. In South Africa, an individual is taxed on a sliding scale whereby the more they earn, the more their average rate of tax will increase. This applies to individuals earning more than R78 750 per annum. A registered company, however, is taxed at a flat rate of 28% of profits, and a further 20% when shareholders receive their dividends
Based on this system, you can see how initially, as you start up and remain within the lower income bracket, it makes sense to operate as a Sole Proprietorship. However, as your company grows and your profits increase, you may lessen your tax burden by registering as a (Pty) Ltd. That said, it’s important to perform an in-depth analysis of both situations and assess which will be the most beneficial, taking into account factors such as tax incentives for registered companies, deductions and allowances.
Starting a business in South Africa is not as complicated as you may think. With the right guidance and advice, you can register your new business in just a few days and reap the benefits thereof.
Ready to start a business in South Africa? Talk to our team about our all-inclusive business registration product.