A question I am often asked is; When should I register my business? Now I am no expert so I thought I would ask one for you. My friend Lorette Terry from Savvic Statutory Services has brought some interesting topics for you to consider.
I thought it a good starting point, to begin with, is my standard answer to the question of:
When should I register my business?
• Is your total income in the 18% tax bracket or under as a sole proprietor?
• Do you employ staff?
• Does the public come to your premises?
• How big is your creditor risk?
If your answer is No to all of these and your creditor risk (these are people who you owe money to is very small or preferably nonexistent), then it isn’t always necessary to register a company.
Having said that, however, oftentimes having a registered company provides you with other benefits and registering your business is no longer the minefield it used to be. Thanks to amazing ladies like Lorette, who can assist you from start to finish. Here are some of her thoughts coupled with those of another expert in the industry – Dhiraj Mathapersadh, SAICA Enterprise Development’s Financial Excellence Offering Bookkeeper.
When making that decision it’s important to discuss your options with your accountant or a tax practitioner.
Let’s start off with the why of registering and look at the tax benefits you can apply for as a registered company:
There comes a time in the sole proprietor’s tax profile (especially when you move out of the 18% tax bracket) that it could be more beneficial to register the business as a legal entity. In other words, register as a private company.
SARS realizes that new business and small business are the lifeblood of our economy and they want to encourage their growth and ensure they prosper. They put in place certain tax incentives especially designed for small business. A small business that qualifies as a small business corporation (SBC) pays no income tax on the first R79 000 taxable income (for years of assessment ending on or after 1 April 2019).
Turnover tax is a simplified system aimed at making it easier for micro business to meet their tax obligations. The turnover tax system replaces Income Tax, VAT, Provisional Tax, Capital Gains Tax, and Dividends Tax for micro-businesses with a qualifying annual turnover of R 1 million or less. Any micro business that is registered for the turnover tax can, however, elect to remain in the VAT system.
Ease of registering:
With the new Companies Act in place since May 2011, a Private Company is currently the most inexpensive and suitable legal business format for an entrepreneur. It can be started with one director and one shareholder, with no limitation thereto. Registration processes are fairly quick and easy with minimum compliance requirements.
A very important reason for registering your business is the liability aspect, the more debt you make the higher your personal risk as a sole proprietor.
Protects you from personal liability:
This is the biggest reason why you should register your business. A Private Company (Pty) Ltd is preserved by law as a legal entity. A registered (Pty) Ltd becomes a formal entity which can trade separately from its owners.
Investors’ and owners’ private assets are protected should something go wrong. If the business fails or you are sued, your personal property cannot be seized. By trading informally(Sole Proprietor), you stand the chance of losing your personal assets as there is no separation of assets. As a business owner, you want to protect what you have built; you can purchase assets in the business name and use those assets to trade.
Company Registration protects your business and gives it a unique identity. You can be proud of the fact that you’re a business owner because it’s no longer just an idea, hobby or running informally. It is now a formal legal entity with its own name and address. Registering your business gives you credibility and shows that you are taking this SMME journey seriously.
The registration also protects the business name to a certain degree as it ensures that no other entity can register with the exact name.
Another very important thing to consider, you have built this amazing business. As a sole proprietor when you die essentially so does your business.
Company Registration is important for continuity sake:
People have a lifespan, but businesses can last forever. You don’t start a business with the intention to close it within a year, now do you?
A registered business is an asset (like a house, car and other properties) that can be passed down (as an inheritance) or sold by its owners to a new generation of people who can continue to own and run the business.
You mean business:
Registering your business makes you look serious and attracts more customers’ credibility. Most customers, especially corporate customers, will do business with you only if your business is registered as invoices/ receipts with business details will be required. This speaks to compliance and governance. By not registering your business, you may appear as if you are trying to evade tax. Which speaks to a lack of integrity. A registered business seems to stand more ground when it comes to tender applications.
An integral part of the economy:
Getting your business registered can help you tap into investment opportunities effortlessly. As well as also giving your company a credible reputation which plays a significant role in the growth of your business. More than that, the collective power of small businesses can play a tremendous part in contributing to the economy, as well as create jobs.
As a sole proprietor, all financing is done as part of your personal liability, which is risky. I do however recommend that even a sole proprietor have a separate bank account, as it helps keep your books “clean”.
Financing for your business:
Banks are wary of affording a business loan to an unregistered business. For investors, it’s the same thing. No serious investor will take you seriously if you’re asking for investment when your business is not registered. SARS requires your registered entity to have a separate bank account which leads to more transparency.
I hope we have left you with plenty of food for thought. Drop a comment and let’s chat about the best option for your business.
I have a passion for making order out of chaotic numbers and papers. With 20 years experience, I have mastered getting those admin ducks to obey and stay in their rows.