Many South Africans are faced with a dilemma of choosing whether to register a company with the Companies and Intellectual Property Commission or starting a Sole Proprietorship.
Through the promulgation of the Companies Act 71 of 2008, the government seeks to convert close corporations and sole proprietorships to PTY Companies. While the Act abolishes the formation of new Close Corporations, it does not ban the formation of Sole Proprietorships.
Difference between a Company and a Sole Proprietorship
Investopedia defines a company as a “legal entity formed by a group of individuals to engage in and operate a business—commercial or industrial—enterprise.”
There are different types of companies that can be registered in South Africa under various laws, primarily; Private, Personal Liability and Public companies. All of the above mentioned types of companies require that a memorandum of incorporation be filed with the Companies and Intellectual Property Commission.
However to register as a public company you need to first register with the Johannesburg Stock Exchange under the Stock Exchange Control Act of 1947
Here are the key characteristics of a company:
- A company is a separate juristic person and enjoys limited liability.
- SARS taxes the company for the profit made.
- Ownership is divided into shares.
- There is transferability of shares.
- A company enjoys continuous existence.
On the other hand, sole proprietorships are different from companies, in formation to profit sharing.
According to the South African Revenue Authority, “A sole proprietorship is a business that is owned and operated by a natural person (individual). This is the simplest form of business entity. The sole proprietorship is not a legal entity. The business has no existence separate from the owner who is called the proprietor. The owner must include the income from such business in his or her own income tax return and is responsible for the payment of taxes thereon. A sole proprietorship can operate under the name of its owner or it can do business under a fictitious name. The fictitious name is simply a trade name–it does not create a legal entity separate from the sole proprietor owner. Only the proprietor has the authority to make decisions for the business. The proprietor assumes the risks of the business to the extent of all of his or her assets whether used in the business or not.”
Here are the key characteristics of a Sole Proprietorship:
- A Sole Proprietorship is free from legal formalities such as registering with CIPC.
- Liability is unlimited as the proprietor bears all the losses arising from the business.
- The sole proprietor manages the whole business by himself/herself. He/she plans and executes under his/her own supervision.
- Owner pays tax on his/her own capacity and not as a business.
Tax implications for companies vs sole proprietorships
Sole-proprietor tax implications
Taxes for sole proprietors are levied on the owner’s personal income tax. This means that the owner pays provisional tax to SARS.
The owner of a Sole Proprietorship will have to estimate the amount of profit that he/she will make.
After making estimates he/she will have to pay the first and second provisional tax payments to SARS.
As a sole trader, your tax brackets will be the same as that for individuals. Tax rates for individuals between 1 March 2020 – 28 February 2021 are as follows:
|Taxable Income in rands||Rates of tax|
|1 – 205 900||18% of taxable income|
|205 901 – 321 600||37 062 + 26% of taxable income above 205 900|
|321 601 – 445 100||67 144 + 31% of taxable income above 321 600|
|445 101 – 584 200||105 429 + 36% of taxable income above 445 100|
|584 201 – 744 800||155 505 + 39% of taxable income above 584 200|
|744 801 – 1 577 300||218 139 + 41% of taxable income above 744 800|
|1 577 301 and above||559 464 + 45% of taxable income above 1 577 300|
Companies tax implications
Companies have a wide range of choices when it comes to tax. This is dependent on the amount of profit that a company is projected to make.
If a company projects to earn less than R1 million, they can register for turnover tax. Turnover tax calculates tax due to SARS on turnover.
However, turnover tax doesn’t apply to personal services businesses. Turnover tax for micro businesses for 1 March 2020 – 28 February 2021 are :
|Taxable turnover in rands||Rate of tax|
|1 – 335 000||0% of taxable turnover|
|335 001 – 500 000||1% of taxable turnover above 335 000|
|500 001 – 750 000||1 650 + 2% of taxable turnover above 500 000|
|750 001 and above||6 650 + 3% of taxable turnover above 750 000|
Small companies are defined as companies that make less than R1 million in revenue. SARS accommodates companies that make R20 million or less in revenue.
These companies are called small business corporations for tax purposes.
Small businesses receive special tax preferences from SARS. Not only do small businesses benefit in terms of the revenue they make but also from the purchase of certain assets.
Assets that are bought for manufacturing purposes such as manufacturing machinery receive 100% write off for tax purposes.
Small business corporations tax brackets for the financial years ending 1 April 2020 – 31 March 2021 are:
|Taxable Income in rands||Rate of tax|
|1 – 83 100||0% of taxable income|
|83 101 – 365 000||7% of taxable income above 83 100|
|365 001 – 550 000||19 733 + 21% of taxable income above 365 000|
|550 001 and above||58 583 + 28% of the amount above 550 000|
Besides micro-businesses and small business corporations, normal companies are charged a flat tax rate of 28%. This charge is for a single financial year of a company.
So which type of business entity should you choose?
Companies are a favourable choice at any stage that a business may be in. CIPC and SARS make it clear that owning a company is more beneficial and a better way to save and grow your business.
As a small business, you can take advantage of many tax benefits that small business corporations and micro-businesses receive. You can start a company by yourself and manage it just like a Sole proprietor would.
As a sole proprietor, you have more to lose than when running a registered company. For example, you will be liable to all debt that the business incurs.
To register a company check our step by step guide on how to register a company by clicking here.