Should I register a small business as a company?
So you are starting a business and can’t decide whether it should be a company or remain a sole proprietor. It really depends upon the nature of the business, who your customers or clients will be and your expectation of success. So let’s take a look at it.
One-man goods or service provider to the general public. You don’t expect to do more than earn a decent living, so you want to keep things simple and keep the costs down. Also, the general public don’t usually care whether they are dealing with a company or an individual. As far as they are concerned everything depends on your reputation and, of course, price. If you register a company, then there’s an extra annual tax return, the bookkeeping necessary to produce an Income Statement and Balance Sheet to submit to SARS, an annual CIPC return, registration as an employer (you will be the employee), submission of monthly PAYE payments, annual COID fees, plus four returns per year as an employer. Quite a smack, especially if you can’t do all of those things yourself. So, go the sole trader route, keep proper records, and fill in the income and expenditure of the business on your personal Income Tax return. If you are supplying goods rather than services and you start making significant profits, then check whether your business would qualify as a Small Business Corporation and if so, register a company, then sell the business to the company.
Service provider to companies. In many cases this can be the most problematic business model. If you employ less than three unconnected full time staff and 80% or more of your service business comes from one company only, then your company will be classified as a Personal Services Provider and your client will have to deduct PAYE at 28% whether or not your business is a company. Deductions available to personal service providers are limited to remuneration to employees, contributions to pension, provident and benefit funds, legal expenses, bad debts, expenses in respect of premises, finance charges, insurance, repairs, fuel and maintenance in respect of assets used wholly and exclusively for trade. There is little point in registering a company. If your business falls outside the definition of personal services provider, you will be required to swear an affidavit to that effect and hand it to your major customer(s). They will then be relieved of the responsibility to deduct PAYE. But then, your business may well qualify as a Small Business Corporation, in which case it will have to be a company as individuals don’t qualify. It is well worth qualifying as the tax benefits are tremendous.
Goods supplier to companies. Now we’re on firmer ground. There’s a good chance that your business will qualify as a Small Business Corporation for tax purposes, in which case it will have to be a company as individuals don’t qualify. It is well worth qualifying as the tax benefits are tremendous. If you don’t qualify as a SBC, then talk to me to see what can be done to change that.
Once you’ve decided to register a company, get hold of a reputable practitioner, such as ourselves. You need someone who will assist you with all of the company’s obligations after it has been registered.