There's a lot of paperwork involved in setting up and running a new business in South Africa. In fact, if you leave something out, there are severe penalties you will incur.
But by registering your company right, you'll be able to minimise your tax payments from day one.
Let's look at the different types of companies you can register for and the tax benefits they'll give you.
Starting a new business? Here are two types of companies you can register for
Company type #1: A sole proprietor – trade for your own account. If you're a sole proprietor, you'll trade for your own account. This means your company doesn't exist as a distinct legal entity. As a result, there's no separation between you as an individual and your business interests.
So, 'if you're testing out a business idea this type of company is best suited for you. There're no formalities involved in setting up a sole proprietorship,' says the Practical Tax Loose Leaf Service. You can literally decide on the spot to start a business and actively begin trading as a sole proprietor.
So what's the tax benefit for a sole proprietor?
Tax Benefit: 'You'll only have a 33% CGT inclusion rate, scaled tax tables resulting in profit being taxed at rates lower than 28%,' says the Loose Leaf.
Since your business profit is included in your own final taxable income, you can deduct your pension and medical contributions from your business profit (as long as it's not ring-fenced). There's also no dividends tax to pay as all the profit earned is already yours.
Company type #2: A partnership – pool your assets. This is where two or more people pool their finances, assets and skills to carry on a business venture. Like the sole proprietor, a partnership doesn't exist as a separate legal entity.
Each partner is jointly and severally liable for the debts of the partnership. This means 'if the partnership defaults on its obligations, the creditors can look to any of the partners for the payments,' says the Loose Leaf.
If you're an accountant, attorney or doctor, this form of business is the one you'll probably go for.
Tax benefit: The tax benefits in a partnership are the same as the one of a sole proprietor.
By understanding the type of company you can register will help you structure your business effectively and minimise your tax payments.