What is a Small Business Corporation?
Many companies can qualify as Small Business Corporations (SBCs) and save a lot of tax, but most entrepreneurs are unaware of these benefits. The requirements are, in most cases, not difficult to satisfy.
First off, the SBC must be a company or CC and all of the shareholders (or members) must be natural persons, so that rules out holding companies and trusts.
Then the shareholders may only be shareholders of the SBC or of dormant companies (or CCs) each with assets of less than R5 000. If any of them hold other shares, they should sell those shares to a trust.
The annual turnover of the SBC may not exceed R20m and no more than 20% of this may be from personal services or property rental. Neither may it be a labour broker.
If a personal services company employs at least three full time independent people in its core business then it can qualify as a SBC.
What are the benefits?
The big one is that special tax rates apply up to taxable income of R550 000 and by the time the SBC gets to that level, it will be saving R95 000 per year in tax.
Then, it can write off manufacturing equipment entirely as a tax deductible expense in the year of purchase.
And any other fixed assets may be expensed at the rates of 50% in the first year, 30% in the second and 20% in the third, saving even more tax.
Are there any downsides?
As the shares in the company cannot be held by a trust, they are not protected from creditors or from the taxes on death. However, R95 000 is a lot of tax to save!