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Starting your own business: the basics
As a budding entrepreneur, it's often difficult to give your new business the wings to fly. Take off securely by knowing how you want to structure your business. By knowing proper accounting and the taxes involved, make sure that you don't have your wings clipped mid-flight!
Sole Proprietorship
This type of business is owned by one person.
Some advantages: - simple
- you, as owner are free to make decisions.
- minimum of legal requirements
- you, as owner receive all the profits.
- easy to discontinue
Some disadvantages: - Unlimited liability. The owner is legally liable for all the debts of the business. Not only the investment, but any personal and real property may be attached by creditors.
- Limited ability to raise capital, a problem when expansion requires new capital. A common cause of failure of this form of business.
- You, as owner bring in your own skills. Other skills you have to hire, incidentally or by employing individuals on a regular basis.
Partnerships
A partnership is between two or up to 20 persons who join together to carry on a trade, business or profession. Each person contributes money, property, labour or skills, and each expects to share in the profits and losses. It is like a sole proprietorship except that a group of owners replaces the individual owner.
Some advantages: - It is easy to organise.
- It has greater financial strength.
- It combines managerial skills of the partners.
- It has a definite legal status.
- Each partner has a personal interest in the business.
Some disadvantages: - Unlimited liability of the partners. Each partner may be held liable for all the debts of the business.
- Therefore, one partner not exercising good judgement can cause the loss of the assets of the partnership as well as the personal assets of the remaining partners.
- The authority for decisions is divided.
Close Corporation
A close corporation is much the same as a private company. It is a legal entity with its own legal personality and perpetual succession. The owners of the close corporation are the members. Members do not hold shares but have an interest in the close corporation. The interest is expressed as a percentage. Membership as a rule is restricted to natural persons. The maximum number of members is 10.
Some advantages: - It is relatively easy to organise.
- The life of the business is perpetual (i.e. continues after members die).
- The members have limited liability (i.e. they are not personally liable for the business debt).
- The transfer of ownership is easy.
- Fewer legal requirements than a private company.
Some disadvantages: - Special taxation rates.
- More legal requirements than a sole proprietorship or partnership.
Private Company
A company is treated by law as a single legal entity. It has a life separate and apart from its owners with rights and duties of its own. The owners of a private company are the shareholders. The managers of a private company may or may not be shareholders. The maximum number of shareholders is restricted to 50.
Some advantages: - The life of the business is perpetual.
- The shareholders have limited liability.
- The transfer of ownership is easy.
- It is easier to raise capital and to expand.
- Efficiency of management is maintained.
- It is adaptable to both small and large business.
Some disadvantages: - Special taxation rates.
- It is more difficult and expensive to organise than other forms of ownership.
- It is subject to many legal requirements.
Registration
Before you actually start your business it may be necessary for you to register with certain authorities such as the Receiver of Revenue ("taxman") to begin with. Because she or he wants to levy:
- Income tax (for this you will get a reference number). Sole proprietorships and partnerships do not have separate legal personalities as is the case with close corporations and companies. With a sole proprietorship, the owner or proprietor must include the income from his business in his own gross income as he is responsible for the payment of taxes thereon in his individual or personal capacity. This is also the case with partnerships. A partnership is not a taxpayer but each partner is taxed on his share of the partnership profits. Close corporations and private companies are legal entities and have separate legal personalities of their own. They must therefore register as taxpayers in their own right as opposed to a partnership or sole trader/proprietor where the only taxpayers are the owners or partners of the business. Unlike natural persons, a company or close corporation pays tax at flat rate (35% tax 12.5% STC).
- Employees tax (PAYE) for any employees you might have. You must deduct this tax from their salaries or wages and pay for your local Receiver of Revenue. The advantage of this system to employees is that payment of tax is spread over the whole year so that it will not be necessary for them to pay a lump sum at the end of each year. If an employee leaves your service, you must immediately inform the Receiver.
- Value-Added Tax (VAT), to be included in the price of every taxable supply (i.e. the sale of goods and/or the supply of services) and meant for the taxman. Where a vendor's output tax (i.e. VAT charged on supplies of goods or services) exceeds his input tax (i.e. VAT paid or payable by a vendor on goods or services which are acquired for the purpose of making taxable supplies) the difference is the VAT payable by the vendor. Where the input tax exceeds output tax for any period a refund will be paid to the vendor. Because every vendor within the production and distribution chain is liable for VAT, but claims the amount of tax paid in respect of inputs by setting it off against its output tax, the total amount of tax is collected by the Receiver of Revenue at the final stage of consumption. The end consumer is therefore actually paying on the value added: hence the term Value-Added Tax. But only when your taxable supplies exceed, or likely will exceed R150,000 per annum, you are obliged to register for VAT.
In case you are an employer you must within 14 days of commencing business submit to the Unemployment Insurance Fund a notification which can be obtained from the fund on application. This fund is administered by the Department of Manpower, and all correspondence must be addressed accordingly.
All employers who are not required to register with SARS for PAYE or SDL purposes, must send their contributions directly to the Unemployment Insurance Fund.
The UIF bank particulars can be used to deposit UIF contributions:
FNB 62052400547 25-31-45 (employers of domestic workers only)
FNB 51420056941 25-31-45 (commercial employers)
ABSA 4055481885 32-31-45 (all employers)
STANDARD 010032185 00-45 (all employers)
BANK NEDBANK 1454041560 14-54-05 (all employers).
They must always ensure that their UIF reference number is completed on the deposit slip when payment is made.
Contact www.uif.gov.za
Any person who has other persons in his employ or who owns a business must register with the R.S.C. To do so contact your local Regional Authority first.
Other authorities with which registration may be necessary, depending on your type of business: - Local licensing authorities.
- Health authorities.
- Customs and excise authorities
Record keeping
If you are involved in a business you must keep records that will enable you to prepare complete and accurate tax returns. The records must clearly establish what your income and expenses are. This means that, in addition to your permanent books of account or records, you must maintain all other information that may be required to support the entries on your records and tax returns. Paid accounts, cancelled cheques, etc. that support entries in your records should be filed in an orderly manner and stored in a safe place. For most small businesses, the business chequebook is the prime source for entries in the business records. Be sure to open a separate bank account for your business so that you do not mix your private and business expenses. A company is required by law to appoint an auditor who will audit and sign its financial statements. Similarly a close corporation is required to appoint an accounting officer. Normally the auditor or accounting officer will provide assistance in determining the taxable income and the amount of tax to be paid.
There are good reasons for accurate records. - Know the source of receipt.
- Prevent omission of deductible expenses.
- Establish amounts paid out as salaries or wages.
- Explain items reported on your income tax return.
You are required to keep the books and records of your business available at all times for a period of up to 6 years. The retention period commences from the date of the last entry in the particular document, record or book.
Net profit and income tax
In order to prepare your income tax return, you will need to determine your business' profit or loss. Basically: income - expenses = profit (loss). Gross sales is the income a business receives. Gross profit is the gross sales less the cost of goods sold or expenses for rendering your services (travel, books, etc.). Business expenses are the necessary expenses incurred in the operation of the business. Net profit is the amount by which the gross profit of a period exceeds the expenses of the same period. Net loss is the amount by which the expenses exceed the gross profit. Net profit serves as the basis for the calculation of your income tax.
All that you would rather forget about, but must know anyhow, can be found on www.sars.gov.za
Physical Address: South Africa Revenue Service (SARS)
Pretoria Head Office
299 Bronkhorst Street
Private Bag X923 Pretoria 0001
Tel: 012 422 4000 |
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