“...but in this world nothing can be said to be certain, except death and taxes.”
Choosing the type of business entity that will best suit your business and your purse strings is not a decision to be made lightly. There are many legal, administrative and tax implications that you need to consider. Every natural or legal person must register as a tax payer and depending on the size of turnover, payroll and the nature of the business, other taxes or duties such as VAT, PAYE, Customs, Excise, and SDL may be payable.
The simplest and cheapest business entity is the sole proprietorship. These are businesses that are owned and operated by natural persons and the existence of the business is inseparable from that of the proprietor. The income for the business must be included in the proprietor’s personal income tax return and all taxes payable must be paid by the proprietor. Similarly, a partnership is also not a separate legal entity. Each partner is taxed in his/her personal capacity according to his/her respective shares in the business.
A private company, on the other hand, is treated by law as a separate legal entity and must register as a taxpayer in its own right. The advantage is that companies are liable to pay a flat rate of 28% of taxable income as opposed to the sliding scale applicable to natural persons (ranging from 18 to 40%). However, before you rush to register a private company, it’s important to note that “every shareholder and director who controls or is regularly involved in the management of the company’s overall financial affairs shall be personally liable for, amongst others, PAYE, VAT, additional tax, understatement penalty, penalty or interest for which the company is liable if the taxes have not been paid to SARS within the prescribed period. In addition, companies are subject to onerous administrative and governance regulations.” (WWW.SARS.GOV.ZA)
There is a bit of relief available to micro enterprises (turnover of less than 1 million). If like me, you are administratively – challenged, then this could be an attractive option. Turnover Tax (a single tax) was introduced by SARS as a tool to help streamline tax obligations. As the name implies, it is a tax based on the taxable turnover of a business. It replaces VAT, Provisional Tax, Income Tax, Capital Gains Tax and Secondary Tax on Companies with a single tax. It is not necessarily cheaper but it is simpler and may save in time and effort.
For further information, refer to The Essential Guide for Small-Business Owners, Nedbank, pp10-12