Different types of companies
Most small businesses are sole proprietorships because this type of business is the easiest and least expensive way to start a business. But what is a sole proprietor? Should you start a sole proprietor business?
Are You a Sole Proprietor?
If you haven’t selected a specific business form and registered it with your state, you are most likely a sole proprietor. You can stay as a sole proprietor your entire business life, or at some point, you may want to consider a different business form, for several reasons. This article reviews the advantages and disadvantages of the sole proprietor business, to help you decide when to move to another business form.
What is a Sole Proprietorship?
The sole proprietorship is the oldest and simplest form of business ownership. A sole proprietorship (or “sole prop”) is a form of business in which an individual starts a business under his or her own name. It’s a one-person business; if there is more than one owner, your business can’t be a sole proprietorship. In a sole proprietorship, you are the business; that is, the business is not a separate entity from you.
A sole proprietorship is unique because it’s the only business that doesn’t have to register with a state (with CIPC). All other business types – partnerships, limited liability companies, and corporations – must file a registration form with CIPC before they initiate business.
How Does a Sole Proprietorship Get Started?
Starting a sole prop business seems simple, and it is. To start a sole proprietorship, all you need to do is:
- Create a business name and decide on a location for your business
- Set up a business bank account so you don’t mix up business and personal spending.
- Keep track of all your expenses i.e. bookkeeping, as you are required to submit a tax return to SARS as a sole prop
- Create a marketing plan for your business
Advantages of Sole Proprietor Form
You don’t need to prepare any legal documents because you are not in business with someone else, and you don’t have to set up an elaborate business structure: no board of directors, no meetings, no minutes, no complicated accounting for shares in the business, just straight forward bookkeeping.
The advantages of forming a sole proprietorship include:
As the sole owner of the business, you have complete control over all the operations, and you get to make all the decisions. You don’t have a board of directors, shareholders, or other owners to answer to.
Tax Preparation and Filing
Sole proprietorship income taxes are easy to file, adding the income/loss from the business to your other income on your personal tax return (ITR12).
Use of Losses
Because you are including your sole proprietorship income/loss on your personal tax return, you can use any business losses to offset personal income from other sources (a spouse’s salary, for example). You do need to be careful not to run up against the SARS restrictions on “hobby” businesses which generate losses for years, but if you can prove your business is legitimate and not a hobby, those losses can lower your taxes.
Disadvantages of the Sole Proprietorship
The primary disadvantage of a sole proprietorship is that your personal finances and those of your business are one and the same. You cannot file bankruptcy for your business without filing personal bankruptcy.
You cannot expect to shield your personal assets from liability for the debts of the business, nor can you avoid being sued personally for negligence due to some problem with your business.
For example, if your sole proprietorship cannot pay its bills, your personal credit card will probably come into use. And filing bankruptcy for your sole proprietorship, whether it is a reorganization or liquidation means involving your personal assets. As stated SA government: “a bankruptcy case involving a sole proprietorship includes both the business and personal assets of the owners-debtors.”
For many business people, the issues of personal liability and involvement of personal assets outweigh the advantages of sole proprietorship structure. If this is the case with you, consider registering a Pty. Ltd. company with CIPC.
Getting Business Insurance Protection
You can’t protect your personal assets if your business is in trouble financially, but you can get some protection from liability lawsuits if you get property and liability insurance. You will probably have to get this insurance specifically for your business, but it can help protect you if your business is involved in a liability lawsuit.
If you drive your car for business, you might want to get business auto insurance to cover you while on business trips. Most personal auto policies won’t cover business driving.
Taxes and Sole Proprietorships
The sole proprietor pays income taxes on all of the net income of the business (income minus deductions), even if you don’t have cash in hand to pay these taxes.
Your business income is included with your personal income on your personal tax return. The tax rate you pay may on the business income is hard to determine, since it’s all combined. The corporate tax rate is 28 percent, so your tax rate may be higher or lower than this. That’s why, if your business is profitable, you may want to consider becoming a registered company with CIPC as there is tax relief for micro, small business companies.
As a sole proprietor (and as the owner of any business except a corporation), you must also pay self-employment taxes (PAYE, UIF etc.) on your business net income.
Check with Tax and Legal Professionals
Even if you have a very small one-person business, you should check with your tax and legal advisors before settling on a business form. There may be other things you need to consider before you start a sole proprietorship business.
Registered Pty Ltd. Company
Since 1 May 2011, the Companies and Intellectual Property Registration Office (CIPRO) ceased to exist and was replaced by the Companies and Intellectual Property Commission (CIPC). The New Companies Act came into being at the same time, changing the way business owners register a company.
The Act stipulates that no new close corporations (CC) can be registered, but those registered prior to 1 May can continue to operate as CCs.
Registering your company
The Companies Act provides for two categories of companies, namely:
- Profit companies.
Each of the different business entities under these categories has specific requirements in terms of the documentation that is required for company registration.
The following article refers to these elements of registering your company:
- Types of entities
- Documentation required
- How to register online
- Types of entities
- A company incorporated for public benefit or another object relating to one or more cultural or social activities, or communal or group interests.
- The income and property are not distributable to its incorporators, members, directors, officers or persons related to any of them.
- Profit companies are categorised as companies without restrictions on the transferability of their shares and that do not prohibit offers to the public (larger public companies), and companies that do contain restrictions on the transferability of their shares and that prohibit offers to the public (smaller private companies).
- They may take one of four different forms: a personal liability company, a state-owned company, a public company and a private company.
Personal liability companies
- The directors and past directors are jointly liable with the company for any debts and liabilities arising during their periods in office.
- The company name ends with the word ‘incorporated’.
- This is a company defined as a ‘state-owned enterprise’ or a company owned by a municipality.
- The names of a state-owned company must end with the expression ‘SOE Ltd’
- The definition of a public company is largely unchanged.
- The only difference is that a public company now only requires one member for incorporation compared to seven members in the past.
- While comparable to private companies under the old Act, these are similar to previous close corporations.
- Some of the changes made to private companies include fewer disclosure and transparency requirements, no longer being limited to 50 shareholders, and a board that must comprise at least one director.
- The name of a private company must end with the expression ‘Proprietary Limited’ or ‘(Pty) Ltd’.
A company is incorporated by the lodging of a Notice of Incorporation (CoR 14.1) and Memorandum of Incorporation (CoR 15.1 A-E). These forms are available for download from the CIPC’s website.
Memorandum of Incorporation
The Memorandum of Incorporation (MoI) contains the following information:
- Details of incorporators
- Number of directors or alternate directors
- Share capital (maximum issued).
Notice of Incorporation
The Notice of Incorporation, which is lodged with the MoI, contains the following information:
- Type of company
- Incorporation date
- Financial year-end
- Registered address (main office)
- Number of directors
- Company name
- Whether the company name will be the registration number
- The reserved name and reservation number
- List of four names to be checked by the Commission.
To register a private company you will complete either a CoR 15.1A (for a standard private company) or a CoR 15.1B (for a customised private company) and a CoR 14.1. The supporting documents required include:
- Certified ID copies of all indicated initial directors and incorporators
- Certified ID copy of applicant if not the same as one of the indicated initial directors or incorporators
- If an incorporator is a juristic person, a power of attorney is required for the representative authorised to incorporate the company and sign all related documents
- If another person incorporates the company and signs all related documents on behalf of any of the incorporators and initial directors, a power of attorney and certified ID copy of the person is required
- If a name was reserved before filing of incorporation documents, a valid name reservation document is necessary
Non-profit company (NPC) / Non-profit organization (NPO)
A non-profit company is a company incorporated for public benefit or other object relating to one or more cultural or social activities, or communal or group interest.
The income and property of a non-profit company is not distributable to its incorporators, members, directors, officers or persons relating to any of them and must be used to advance the purpose for which it was created, as set out in its MOI. A non-profit company must have at least three incorporators and three directors and may be registered with or without members. A non-profit company is not required to have members. The members of a non-profit company are persons who participate in the activities of the non-profit company, such as members of a church or a pension fund. Non-profit companies registered without members, may be registered with a standard or a customized Memorandum of Incorporation (MOI).
If you wish to receive grants or donor-funding, you are required to register with the Department of Social Development. Non-profit companies registered with the Department of Social Development can apply for funding at the National Lottery Board.
What does it mean to register as a NPO, NPC, PBO?
The Non-Profit Organisations Act 71 of 1997 (hereinafter “NPO Act”), came into operation on 1 September 1998 as a result of a lengthy process of policy and legislative reform negotiated between the state and civil society organisations.
Primarily, the NPO Act’s objectives are to create an enabling environment for nonprofit organisations (NPOs) and setting and maintaining adequate standards of governance, accountability and transparency by creating a voluntary registration facility for NPOs.
An NPO is defined in Section 1 of the NPO Act as a trust, company or other association of persons established for a public purpose and of which its income and property are not distributable to its members or office bearers except as reasonable compensation for services rendered.
The Non-profit Organisations Directorate was established in terms of the NPO Act to administer the Register of NPOs in South Africa. The NPO Directorate is a public office and holds information about registered NPOs that is accessible to the public.
The Difference Between an NPC and NPO
The difference between an NPC and NPO is not immediately apparent, even in my post where I compare NPO types. Let’s make an attempt to delve a little deeper into the meaning of each, and then compare the differences.
Non–profit organisations (NPO)
The Nonprofit Organisations Act, 1997 (Act No. 71 of 1997) replaced the previous Fundraising Act (Act No. 107 of 1978) and came into operation on 1 September 1998 and was amended by the Nonprofit Organisations Amendment Act, 2000 (Act No. 17 of 2000). Since 2012, there has been a draft NPO Policy Framework in the making, aimed in part at increasing regulation of the nonprofit sector. NPOs are administered by the Nonprofit Directorate of the Department of Social Development (DSD).
Most NPOs are Voluntary Associations (VAs), but an NPC or Trust may register as an NPO in addition to their registration with CIPC (NPCs) or the Master of the High Court (Trusts) if they choose to.
While some choices of NPOs are limited by law, they are generally free to choose how they structure themselves and function.
To register as a NPO, organisations are required to complete a prescribed application form and submit same to the Directorate for NPOs, which forms part of the Department of Social Development:
- With two copies of the organisation’s founding document, i.e. a constitution for a volunteer association;
- Memorandum of incorporation with the company’s registration letter for a non-profit company;
- A deed of trust with the trustees authorisation letter for a trust etc.
(A more detailed list of requirements can be viewed at www.dsd.gov.za)
This founding document of the organisation must meet the requirements of Section 12 of the NPO Act, which shortly, includes the following:
– The organisation’s main and ancillary objectives;
– That the organisation’s income and property are not distributable to its members or office-bearers, except as reasonable compensation for services rendered;
– Make provision for the organisation’s continued existence notwithstanding changes in the composition of its membership or office-bearers;
– Ensure that the members or office-bearers have no rights in the property or other assets of the organisation – specify the organisational structures and mechanisms for its governance;
– Set out the rules for convening and conducting meetings
– Set out a procedure by which the organisation maybe wound up or dissolved;
– And provide that when the organisation is being wound up or dissolved, any asset remaining after all its liabilities have been met, must be transferred to another non-profit organisation with similar objectives.
The status of registering the organisation as an NPO is furthermore a funding requirement for most donor and funding agencies.
Non-profit company (NPC)
A non-profit company (hereinafter “NPC”) is a company incorporated for public benefit or other object relating to one or more cultural or social activities, or communal or group interest. The name of the company must end with the abbreviation “NPC”.
The Companies Act, 2008 (Act No. 71 of 2008) replaced the previous Companies Act (Act No. 61 of 1973) and came into operation on 1 May 2011. With the act, previous “Associations Incorporated Under Section 21” were automatically deemed to have amended their Memorandum of Incorporation (MOI) to reflect that they were now Section 10 NPCs, compliant with the new law and required to append NPC to their names. NPCs are regulated by the Companies and Intellectual Properties Commission (CIPC).
NPCs are subject to the Companies Regulations, 2011, which can compel them to subject to auditing of financial statements if they meet certain criteria, instead of an independent review. Most NPCs conduct annual audits, despite the provision to only submit an independent review of financial statements.
An NPC has limited choices in how it structures itself and functions, since much of it is regulated by law.
The income and property of an NPC is not distributable to its incorporators, members, directors, officers or persons relating to any of them and must only be used to advance the purpose for which it was created. This should be set out in the company’s Memorandum of Incorporation (MOI).
An NPC must have at least three incorporators and three directors and may be registered with or without members. The members of an NPC are usually persons who participate in the activities of the NPC. Non-profit companies registered without members, may be registered with a standard or a customized MOI.
It is important to remember that an NPC is still a company at the end of the day and is still required to comply with ongoing administrative requirements set out in the Companies Act 71 of 2008, including the filing of annual returns.
Incorporation as an NPC does not necessarily qualify the company for any particular treatment in terms of the Income Tax Act 58 of 1962, or any other legislation. The NPC has to apply to the South African Revenue Service (SARS) for a tax-exempt status, known as Public Benefit Organisation (PBO) status.
This will allow the company to receive tax benefits to reduce their tax burden and when registered as a PBO, donations made to the non-profit company are deductible from the donor’s tax liability in terms of Section 18 of the Income Tax Act.
If the company wishes to receive or apply for government funding, a fund raising number, grants or donor-funding, it will be required to register with the Department of Social Development as an NPO.
Public Benefit Organisations (PBO)
NPOs play a significant role in society by taking a shared responsibility with government for the social and development needs of the country. Therefore, preferential tax treatment is provided to assist these NPOs by augmenting their financial resources.
This preferential tax treatment is however not automatic, and organisations that meet the requirements set out in the Income Tax Act, must apply for this exemption. If the exemption application has been approved by SARS, the organisation is registered as a Public Benefit Organisation (PBO) and allocated a unique PBO reference number.
The conditions and requirements for an organisation to be approved as a PBO are contained in Section 30 of the Income Tax Act. The rules governing the preferential tax treatment of PBOs are contained in Section 10(1)(cN) which provides for the exemption from normal tax of certain receipts and accruals of approved PBOs.
Approved PBOs have the privilege and responsibility of spending public funds, which they derive from donations or grants, in the public interest on a tax-free basis.
The main differences between an NPC and an NPO are the laws they are guided by, the organisations they report to, how long records are kept, whether audits are mandatory and the personal liability of board members.
It is thus clear that these different registrations for a non-profit organisation go hand in hand and it is necessary to register your NPC or non-profit trust as both an NPO with the Department of Social Development and an PBO in terms of the Income Tax Act to derive all the possible benefits you can.
About registering a non-profit company
For your civil society organisation to be recognised as a legal entity, you must register it as a non-profit company (NPC) with the Companies and Intellectual Property Commission (CIPC).
NPCs are entities that are set up to help people, protect the environment or to lobby for some good cause. They could include churches, charity organisations and cultural organisations. The primary objective of an NPC is to benefit the public, not to make profit.
The income and property may not be distributed to the incorporators, members, directors or officers of a non-profit company, except as reasonable compensation for services rendered by them. All of a non-profit company’s assets and income must be used to advance its stated objectives, as set out in its Memorandum of Incorporation (MOI).
A minimum of three incorporators must complete and sign the MOI. A minimum of three directors must be appointed.
Non-profit companies must at all times have at least three directors (unless MoI indicated a higher minimum number of directors). The appointment of an auditor and company secretary is not mandatory but optional.
You can register a non-profit company as a:
- Standard non-profit company (with members)
- Standard non-profit company (without members)
- Customised non-profit company (with members),
- Customised non-profit company (without members).
The name of a non-profit company will end with “NPC”.
What you should do
- Reserve a company name by completing the Application to Reserve a Name, Form CoR 9.1. A name reservation is valid for six months.
- Pay a filing fee.
- Submit the following supporting documents with your application:
- Certified passport copies (if foreign national) or certified identify document (ID) copies (if South African) of all indicated initial directors and incorporators
- A certified ID copy of the applicant if the application is not made by one of the indicated initial directors or incorporators
- If an incorporator is a juristic person, then a power of attorney for the representative authorised by that juristic person to incorporate the company and sign all related documents
- If another person incorporates the company and signs all related documents to the incorporation on behalf of the incorporators and initial directors, a power of attorney and certified ID copy of such a person is required
- If a name was reserved before the filing of incorporation documents, then a valid name reservation document is necessary.
Please note: If a proposed name is rejected, the company may still be registered and the registration number then becomes the name of the company at incorporation, until such time as an appropriate name has been reserved/approved.
How long does it take
It takes a maximum of three days to reserve a name for a company.
It takes 25 working days from receipt of application to register a non-profit company.
10 things you need to know about starting a business in SA – from registering your company to paying tax
South Africa is alive and buzzing with entrepreneurs, possibly because the country’s high unemployment rate is spurring individuals on to start their own businesses.
But going into business blindly can be daunting. Not knowing the necessary procedures and rules of engagement can get problematic and, even more importantly, cost a bit more than a few initial lessons, says Riki Marais, a manager at accountancy firm Hobbs Sinclair.
Marais shares some of the most common mistakes a start-up can make and the questions you should be asking if you intend to start your own business.
Why do I need to register my company?
Company registration guarantees several legal benefits, one of which is asset protection.
For example, keeping personal assets safe in case of a lawsuit against your company.
“If a company is legally registered, others can’t claim your business name as their own, which is not the case if unregistered”.
Also, registration gives customers an extra reason to put their trust in you. Registration signals that you take your business seriously. And no one wants to transact with a shady business.
Another benefit, says Marais, is that funding is more easily acquired by registered businesses. Banks do not give business loans to unregistered companies, as the risks are too high for them. Similarly, investors will only put money into a business which they feel has great potential. Not being registered will likely count against you.
How and where do I register my company?
We can register your business online with Companies and Intellectual Property Commission (CIPC).
Do I have to register for VAT? When do I need to register for VAT?
It isn’t necessary to register for VAT right away. In fact, VAT registration is voluntary if income for a 12-month period exceeds (or is estimated to exceed) R50,000. However, VAT registration is compulsory if income for a 12-month period exceeds (or is estimated to exceed) R1 million.
Should I employ people to work for me and put them on my payroll, or is it smarter to hire contractors?
The answer to this question depends on the employer: in both cases, it will be an expense on your income statement. Think about long term needs for the firm, but there are advantages to either option. If you opt to employ people, these employees are more likely to be loyal to your firm and will generally stay long term. Also, employment builds company and industry knowledge.
With contractors, however, no PAYE submissions to SARS are necessary and you are not liable for workman’s compensation; contractors are helpful in the short term; and contractors allow for savings during slower seasons.
Why must my company have its own bank account?
This is a SARS requirement. A company bank account ensures separation of business and personal transactions for ‘cleaner’ bookkeeping. Moreover, this is a SARS requirement.
What is the best way to keep my bookkeeping up to date and in tow? Do I really need to buy a software package?
Most accountants recommend using accounting software to record transactions and financial position. However, it is not truly necessary if the business is small with only a few transactions per month.
“I suggest, therefore, if you really need to save money, use Excel, but there are also some inexpensive options for software out there which come with great time-saving benefits”.
What tax will I have to pay and what tax returns will I need to submit?
There are several taxes and returns to consider:
- Annual returns: Only necessary for companies and CCs, submitted to CIPC;
- VAT: Either by oneself or a professional service provider such as an accountant, by means of a VAT201 form;
- PAYE, UIF & SDL: Only if workers are employees of the business, by means of a EMP201 form;
- Provisional tax: Twice a year, after six months and at year-end (advance payment towards yearly income tax);
- Income Tax @ 28% of taxable income (28% for companies; individuals according to tax scale): Due annually, one year after financial year end;
- Dividends: A dividend tax of 20% paid to SARS when declaring dividends. This will likely not happen in the early stages of a business, as most businesses prefer to spend surplus funds on assets and growth.
If I’m looking for capital, what sort of finance should I apply for?
The answer to this depends on the financial position of your company. For example, you might consider debt finance, which is cheaper, but riskier. Taking on more debt increases the gearing (debt-to-equity ratio) of your company. Companies might struggle to receive future debt finance if they are already highly geared. Also, you must consider that risk stays with business to repay the loan or bond should the business fail. On this flip side, the advantage is ownership retention.
Equity finance, on the other hand, means cash from investors in exchange for shares. While the advantage is that investors take on all risk, the disadvantages include ownership, profit sharing with investors, and more difficulty finding ideal investors.
What is workmen’s compensation and must I comply?
Workmen’s compensation is to be paid by employers for each employee (not applicable to contract workers). It is insurance against occupational injury, diseases or even death. As such, all employers need to comply for their employees to make claims in the unfortunate event of injury, disease or death.
This can be done online, once a year. However, be aware that there are a few exclusions on type of employees who qualify.
Legal requirements you should comply with to run a business in South Africa
Register the business with CIPC
The Companies and Intellectual Property Commission (CIPC) should be your first point of contact. This organisation has been established in order to administer the registration of companies, cooperatives and intellectual property rights such as trademarks, patents, designs and copyright.
CIPC allocates you a Tax Number for your company
Upon registering as a new company you will automatically be allocated a tax number which will be visible on you ‘free disclosure certificate’ and it is mandatory that companies submit ITR14 companies tax via SARS efiling or at the nearest SARS branch.
SARS Registration for Income Tax
South African Revenue Services (SARS) takes care of all tax matters and it is a legal obligation to pay tax regardless of the size of business being run. The law dictates that a business is registered with SARS within 60 days of starting operations. For those registered with CIPC the registration is automatic except sole proprietors or partners who need to register as provisional tax payers directly.
Department of Labour
This government department bears the responsibility of ensuring that businesses operate under conducive environment and abides by laid down legal provisions. Businesses with one or more full time employees are therefore required to register in accordance with the Compensation for Occupational Injuries and Diseases Act (COIDA).This Act has been put in place to safeguard the rights of employees who are injured, contract a disease or get killed as a result of their work.
Unemployment Insurance Fund
Unemployment Insurance Fund (UIF) benefits workers when they can’t work due to maternity, adoption leave or illness. UIF registration can be done on form UF8 at any SARS office or online.
The law demands that if you employ one or more staff members who earn over R40,000 per year, you have to register your company for Pay As You Earn (PAYE). If your payroll is more than R500,000 a month, you must register for skills development levy (SDL). The funds are to be used to develop and improve skills of employees.
As per the companies act section 28 (1) all registered companies are required to keep accounting records (bookkeeping) which is to run (as per SA standard financial year) from 01 March 2018 to 28 February 2019 which will equal to one financial year.
This accounting records will be used to calculate your income tax return with SARS as well as the companies annual income tax return with CIPC.
Private or personal liability companies that are required to be audited by the Companies Act, 2008 or regulation 28, must file a copy of the latest approved Audited Financial Statements on the date that they file their annual return with the CIPC.
The following private companies are required to have their annual financial statements audited:
- Any private or personal liability company if, in the ordinary course of its primary activities, it holds assets in a fiduciary capacity for persons who are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds R5 million;
- Any private or personal liability company that compiles its financial statements internally (for example, by its financial director or one of the owners) and that has a Public Interest Score (PIS) of 100 or more;
- Any private or personal liability company that has its financial statements compiled by an independent party (such as an external accountant) and that has a Public Interest Score (PIS) of 350 or more.
CIPC (Annual Returns)
You are also required to submit an annual return to CIPC on the anniversary date of your companies registration (and for each year following).
Failing to submit your annual return for two consecutive years will result in your company being automatically entered into the deregistration process.
Note: If your company has entered the deregistration process but has not yet been deregistered you will have a small window of opportunity to submit your annual return which will automatically change the status of your company from ‘deregistration process’ to ‘active’.
CIPC (Director Details)
Companies is required to keep up to date records with CIPC with regards to the active directors of your company such as: new director appointed; director dismissed; director left the company; director is deceased etc.
CIPC (Company Details Update)
Companies are also required to keep accurate records with CIPC for: Company address and company name changes.
Once your company reaches R1 million in sales threshold, it is mandatory that you register for vat within 21 days of the date of exceeding the R1 million threshold.
Companies may also register for vat voluntarily.