Sole Proprietor or Company
There has been a rapid increase in the new registration of companies and so many sole traders taking the leap of faith to start their own businesses. Starting the new business and keeping the doors open is challenging to say the least.
Here we examine the main differences between a Sole Proprietorship and a Company so that you can make a more informed decision about where to start and the tax implications of the two methods of trading.
Ultimately the type of business structure will impact the legal requirements and liability. Shareholders of a private company can only be held liable for debts and defaults as far as their shareholding interest and this provides what is known as limited liability.
What is the difference between a Sole Proprietor and a Company?
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Sole Proprietor
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Company (Pty) Ltd
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Legal Status
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The owner and business are the same legal entity
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The Company is a separate legal entity
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Number of owners
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Only one owner
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Companies may have one or more owners
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Capital required
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Minimal start-up capital required
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High start-up capital due to the compliance required ie registrations
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Who has control?
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The sole proprietor has full control over their business
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The Directors all have shared control
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Liability
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The sole proprietor is responsible for all the business debts.
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The Company being a legal entity on its own means there is limited liability. This means shareholders can only lose what they have invested in the company and can’t be held liable in their personal capacity.
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Registration requirements
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None – However reserving a name might be a good idea ie: James Smith Sole Proprietorship trading as Smith’s Coffee for All (Pty) Ltd
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The Company must:
- Register with CIPC
- File Annual Returns
- Maintain compliance with the Companies Act
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How is tax calculated?
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The sole proprietor is responsible for all their business and personal income and expenses. The Sole Proprietor will need to register for Income Tax and Provisional Tax.
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The Company is liable for its own income and expenses and the resulting taxes. The Company receives its own tax number and will have to submit annual income tax & provisional tax returns.
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Tax Rates
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Income Tax Tables for Individuals. Not exposed to dividends tax
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Taxed at a fixed rate of 28% as well as dividends tax on distributions
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Tax & Other Registrations
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VAT
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If turnover exceeds R1million it is compulsory to register
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If turnover exceeds R1million it is compulsory to register
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PAYE
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Only required to register if there are employees
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Must register as an employer with SARS and the director’s salary is subject to PAYE deduction.
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Workmen’s Compensation
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Required to register if there are employees.
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Required to register if there are employees.
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From the above table it is very clear that it is far easier to set up a sole proprietorship as there is less admin involved. What needs to be considered as well is the tax implications. A sole proprietor does qualify for tax rebates and is taxed on a sliding scale which can significantly reduce the amount of tax payable.
Sole Proprietors should also note that even though they are sole traders they would still need to prepare financial statements if they have intentions of applying for loans and mortgages etc. Banks still require proof of the trading history in a format that will allow them to assess their risk. We can assist in the compilation of these financial statements.
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