Should I provide my services through a shelf company?
I have already discussed whether a trader should trade through a company, but what about a service provider? A service provider is a business that supplies services rather than goods. Should it be a company?
If the services are provided mainly (80% or more) to one client, then the company may well be classified as a Personal Services Company, in which case the client must deduct PAYE from all invoice payments.
This often discourages the client from doing business with you. However, the same would be true if you sold your services directly. In that case the client would have to put you on their payroll.
The exception to this is if you employ at least three independent, full time employees, active in the business of providing the services and not under the direct supervision of the client. Then your company would not be classified as a Personal Services Company, your clients would not have to deduct PAYE and the company may be elligible to classify as a Small Business Corporation, an option that is not open to sole traders.
If you have to register as a VAT vendor (either at the insistance of a client or because your turnover exceeds R1m a year), then being a sole trader has the advantage that, provided your turnover is under R2,5m, you can account for VAT on the cash basis, an option that is not open to companies. this means that VAT will no be tied up in your debtors’ book after you have paid it over to SARS.
So, the answer very much depends upon the particular circumstances.