Starting a business is both exciting and daunting. One of the first challenges budding entrepreneurs need to grapple is the type of business entity to go into. The close corporation was previously the most common business entity in South Africa for small and medium business (SMEs) but has since been phased out since the introduction of the Companies Act No. 71 of 2008.
There are now four main business entity options to decide upon, each with their own pros, cons and tax implications, these being:
- A sole trader or proprietor
- A partnership
- A company
- A trust
This is the most common and simplest form of business where you trade under your own name and through your own bank account. There is no separate legal entity which means you are personally liable for all debts incurred. Company registration is not required by the Companies and Intellectual Properties Commission (CIPC) and neither is Memorandum of Incorporation (MOI).
You will be required to include the income of the business in your own income tax return and as you employ people you will have to register for PAYE in your own name. In terms of tax rates, your income tax is at the marginal rate which varies in bands from 0% (up to R79 000 per annum if under 65 years old) to 45% on amounts over R1.5m.
This is another simple enterprise where two or more sole traders work together. In this case it is important to have a detailed, written and signed partnership agreement in place. In a partnership you are also liable for the debts of your partner unless you structure an en commandite partnership which limits liability.
These are more sophisticated business entities and form a separate legal entity. The shareholder or director will not have liability for the debts of the company unless they have signed surety or have breached the provisions of the Companies Act. The number of owners can range from one person to fifty where a one-man company is a private company or owner-managed company and is possibly exempt from an audit depending on certain criteria. Companies need to register with the CIPC and require a Memorandum of Incorporation. Annual returns must be filed with the CIPC to make sure they are up to date with the latest company information. Private companies have limited liability as they are seen as separate juristic persons.
This is where a founder or donor sets up a trust and it is managed by trustees. They should be qualified to manage the assets placed in the trust for the sake of the beneficiaries. There are normally three trustees where at least one needs to be independent. All the provisions are set out in a trust deed, which is logged with the local Master of the High Court who administers the Trust. Trusts need to be registered for Income Tax with SARS and can be registered for VAT and PAYE as well.
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