To avoid the pitfalls of establishing a business, Hanno Bekker – founder and Director of Bekker Attorneys – explains it’s best you start off on your entrepreneurial journey with the basics of setting up the “right” business.
The easy, no-fuss sole proprietor and partnership option
The easiest option is, of course, to just start off as a sole proprietor, as you don’t need official paperwork, or if you are joining forces with others, to form a partnership with just a contractual agreement between everyone.
Bekker explains that with a sole proprietorship and partnership, you remain liable in your personal capacity for the debts of the company and should the business go under, you can literally lose everything.
“You are also liable for the business’s tax obligations. When this kind of business makes a profit, whether you take this profit for yourself or not, you will personally be taxed as if you are going to line your own pockets with it. This will probably lead to you falling into one of the higher tax brackets.”
In partnership, you cannot predict the behaviour of your business partners. They could, through the business, run up enormous debt, which you can be held accountable for.
Registering a company – does a private and public company no longer exist?
Currently, in South Africa, you also have the option of registering a closely held corporation (previously known as a private, (Pty) Ltd, company), or a widely held corporation (previously known as a public company).
When it comes to these company options, you register a separate entity. “This means that the company is completely separate from you – and you yourself are not the company, you work for the company as an ‘employee’, namely a director, who operates affairs on behalf of the business. However, establishing a company means relatively lots of paperwork and ‘red tape’. But in most cases, the company is taxed at a fixed rate, which is 28%, plus dividend taxes, if they are paid out (taxed at 20%).
“For you personally, the tax is deducted from your salary on an employee basis (PAYE). This is not necessarily a bad thing for you personally, because although you draw your own salary, you can structure it in a way that you receive some tax breaks and benefits if you do it correctly,” says Bekker.
Registering as a business trust
In comparison to registering a closely or widely held corporation, a trust is taxed at a fixed rate of a whopping 45%. “So suddenly a business trust doesn’t sound all that attractive, does it?” states Bekker.
Registering a trust is an incredibly tedious process. When setting up the paperwork, you have to make sure that every small detail in a trust is comprehensively explained and not debatable afterwards, otherwise it can become a nightmare. “It is very important that trust is custom-made for your specific requirements, otherwise it can very quickly turn into a legal nightmare.”