Sole Proprietor vs Company

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We get this question from our clients a lot.  Should I register my business as a company, or am I better or remaining a sole proprietor?  Below we have provided a little bit of guidance for you, a list of pros and cons, and how this decision will affect the tax that you pay.

Sole Proprietor

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 business has no existence (therefore it is not a “legal person” such as a “company” as defined in the Act) 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.  Only the owner has the authority to make decisions for the business. The owner assumes the risks of the business to the extent of all of his or her assets whether used in the business or not.

 

ADVANTAGES DISADVANTAGES
Simple to establish and operate Unlimited liability of the owner
Owner is free to make decisions Limited ability to raise capital
Minimum legal requirements Limited skill set (only the owner’s skills)
Owner receives all the profits
Easy to discontinue the business

 

Tax Considerations

As a sole proprietor, all revenue earned in your business will be taxed in the hands of the owner, as an individual.  Tax rates for the 2017 year end: 01/03/2016 – 28/02/2017

Taxable Income (R) Rates of Tax (R)
0 – 188 000 18% of taxable income
188 001 – 293 600 33 840 + 26% of taxable income over 188 000
293 601 – 406 400 61 296 + 31% of taxable income over 293 000
406 401 – 550 100 96 264 + 36% of taxable income over 406 400
550 101 – 701 300 147 996 + 39% of taxable income over 550 100
701 301 and above 206 964 + 41% of taxable income over 701 300

 

So, just to simplify, here is an example of what you would have to pay in taxes:

Taxable Income (R) Rates of Tax (R) Effective Tax Rate (%)
100 000 18 000 18%
200 000 36 960 18.48%
300 000 63 466 21.16%
400 000 94 466 23.62%
500 000 129 960 25.99%
600 000 167 457 27.91%
700 000 206 457 29.5%
1000 000 329 431 32.94%

 

Private Company

A private company is treated by law as a separate legal entity and must register as a taxpayer in its own right. It has a life separate 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.

 

ADVANTAGES DISADVANTAGES
Life of the business is perpetual Subject to more legal requirements
Shareholders have limited liability More expensive to establish & operate
Transfer of ownership is easy
Easier to raise capital and expand
Adaptable model to both small and medium to large business

 

Tax Considerations

As a company, your taxable income is determined AFTER taking into account all your business expenses (this is NOT the case for a sole proprietorship).  Tax rates for the 2017 year end: 01/03/2016 – 28/02/2017 are 28%.

So using the same example as above, one would assume that a taxable income of somewhere above R600 000 will make the tax paid by a sole proprietor and the tax paid by a company equal, however THIS IS NOT THE CASE.

There is a fundamental difference between taxable income as a sole proprietor (individual) and taxable income as a private company.

A sole proprietor is taxed on ALL revenue/income earned.  Once the tax has been accounted for, all left over money can be used to cover expenses.

A private company is taxed on a smaller amount – this amount being revenue/income earned LESS business expenses

 

Example:

Taxable Income: R650 000
Deductible Expenses: R350 000

Tax payable as a sole proprietor = ((R650 000 – R550 100)*39%) + R147 996 = R186 957
Tax payable as a private company = (R650 000 – R350 000)*28% = R84 000

In this example the sole proprietor is paying about R100 000 more than the private company.

How to register a private company, and necessary requirements

  • Lodge forms with the CIPC to register your company – fee of R175 applies
  • Register for companies tax with SARS
  • Depending on turnover and size, may be subject to audit

 

For more info on how to register your company and what documentation is required:

Registering a New Company – entrepreneurmag.co.za

Alternatively, fill out your details below & we will do it for you:

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