Starting your own business is an exciting adventure, but nerve-wracking at the same time. It is important to have a well-thought out strategy when setting out to start your business. Protecting your business legally should be considered before you put any plans into action, and not an after-thought!
Sole Proprietorship/ Company? What should I do?
We all know the famous stories of now-wealthy entrepreneurs, who started their business in their garage. Contrary to popular belief, you do not need a company or an office to get going with your business.
A common mistake people make is confusing the term “starting a business”, with “starting a company.” You do not need to start a company in order to create a business!
That being said, you need to carefully establish what you would hope to achieve in your business before deciding on which vehicle you will use to house your business in.
A sole proprietor is usually an individual who decides to start a business by himself, without registering a company but to transact in their own name, or use a trading name, for example: “John Smith trading as John Smith Plumbers Supreme”. Someone may, for example, decide against acting as a sole proprietor due to liability issues. If liability issues are not a major concern for you, due to the low-risk nature of the services/goods you offer, conducting business as a sole proprietor may suit you perfectly as it can offer less red-tape in the areas of governance and lower running costs. When it comes to providing security for obtaining finance, a sole proprietor would usually offer his own personal assets as security for the loan (where required by the lender). A sole proprietor’s assets are not protected if sued and therefore, for example, you may find your home at risk if you are unable to satisfy a judgment debt or go insolvent as a result of the business.
It was previously possible, when registering a company, to register a private company (Pty Ltd) or a close corporation (a CC). It is no longer possible to register a close corporation in South Africa, but previously registered CC’s may still continue to operate as one. Private companies are now the norm, which can be registered via the Companies and Intellectual Property Commission, or you could purchase a shelf company. It is now relatively quick to register a company or purchase a shelf company. Companies are beneficial in that the company is a separate juristic entity with its own juristic personality. The company is in an event of legal action usually sued, and not the directors (with some exceptions). There is, however, also the need to comply with the provisions of the Companies Act 71 of 2008 when operating as a company and ensure that good-governance principles are upheld.
Funding your small business
It is possible to start a business without much capital funding. That being said, it also depends on your market and the type of business you wish to start. For example, a painter starting a business may only need relatively basic equipment to start out. A restaurant on the other hand will usually have huge start-up expenses, such as up-front lease fees, a lease deposit, staff expenses, furniture and equipment. Most banks will usually need some security before advancing a loan (and not to mention that the borrower should have a good credit record, which if you have never traded before could mean that you have a non-existent record). When approaching lenders for finance, you would usually need to have some kind of security and/or surety for the loan, and at least prepare projected financial statements with a cash flow statement, as well as have a business plan. It is worthwhile to keep on the look-out for small business conferences/ workshops, as it can be a resourceful place to obtain more information on financing arrangements, or find out about companies that are eager to assist grass-root businesses or small businesses with seed funding.
It is good practice to always have up-to-date financial statements on hand. As a sole proprietor, financial statements are not in most circumstances a statutory requirement. Companies are however, due to recent developments with the Companies and Intellectual Property Commission, now required to submit financial statements when submitting annual returns to the Companies and Intellectual Property Commission. Failure to submit financial statements can result in penalties and fines.
Undertake a risk-assessment on the nature of your work. Is there any legal red-tape? Do you need any specific licensing before commencing with that trade? Think food-license, health license, liquor license, planning approval, municipal by-laws, trade and industry regulations as well as company legislation and be sure to seek legal advice before commencing operations. Claiming ignorance of the law does not work!
Companies and sole proprietors alike need to ensure that they are tax compliant. It is essential to file tax returns on time as well as to make payment of any amounts due timeously. Tax compliance includes registering for value-added tax once you expect that your turnover will exceed R1 million in any 12 month period (note- not profit, but turnover!) which can be relatively easy to exceed. It should be noted that the VAT registration requirements also apply to sole proprietors. There are penalties for failing to register when registration should have taken place.
A sole proprietor will not file a separate tax return for the business, but in his/her own name. It is essential to know what expenditure may be deducted in terms of the Income Tax Act 58 of 1962 and what is regarded or deemed to be income or accrued income, to ensure that your tax returns are filed correctly.
With companies, payment for services to a director is usually treated as a salary (remuneration) taxable at the directors relevant tax rates, whilst a payment to a shareholder (aside from repayment of a loan account) is deemed as a dividend (currently taxed at 20%), which dividends tax must be paid to SARS. A company must therefore comply with filing the employee tax returns as well.
There is also a duty to keep records for a period of least five years after the relevant tax period.
Get advice. Plan properly. It’s your dream and your business after all!
Our Corporate & Commercial Department can assist with registration of companies, supply of shelf companies, company administration, drafting of Service Level Agreements, shareholder agreements, sale of business agreements, sale of share agreements, memoranda of incorporation documents, information-use agreements (for POPI purposes), preparation of lease agreements as well as provide advice for starting your business.
Henning Pieterse | Partner
Areas of Expertise: Corporate & Commercial Law
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)