A sole proprietorship is a business that is owned and operated by a natural person (individual). This is the simplest form of business entity. The sole proprietorship is not a legal entity. The business has no existence separate from the owner who is called the proprietor.
The owner must include the income from such business in his or her own income tax return and is responsible for the payment of taxes thereon. A sole proprietorship can operate under the name of its owner or it can do business under a fictitious name. The fictitious name is simply a trade name–it does not create a legal entity separate from the sole proprietor owner.
Only the proprietor has the authority to make decisions for the business. The proprietor assumes the risks of the business to the extent of all of his or her assets whether used in the business or not.
One of the primary advantages of a sole proprietorship in South Africa is that it is easy to set up and maintain. The sole proprietor is the sole owner of the business, meaning that all decisions are made unilaterally and without consultation.
There are certain drawbacks to a sole proprietorship in South Africa. As the sole owner of the business, the proprietor is personally liable for any debts or obligations incurred by the business. This means that the proprietor’s personal assets, such as their home, car, or other investments, are at risk if the business incurs any debts or is sued.
Setting up a Sole Proprietorship
- Choose a business name
- Register your business name via CIPC
- Purchase a website domain name (optional but beneficial)
- Obtain a business license and other permits, where applicable. Licenses and permits will depend on the nature of your business and the local area you’re operating in. For example, health and safety training is required if you’re opening a daycare. Likewise, a health department permit is required if you want to prepare or serve food.
- Create a register of employees for taxation purposes and employee deductions (SARS and Department of Labour).
- Open a business bank account. Even though revenue from your business is passed directly to your personal income, it is recommended that you separate business expenses from your personal expenses.
- Obtain insurance coverage. A sole proprietorship has unlimited liability if your business goes bankrupt or someone decides to take legal action against you. Additional insurance coverage can limit the risks and give you some protection against these scenarios.
One advantage of a sole proprietorship in South Africa is that the business owner is able to take advantage of certain tax benefits. The business owner is able to declare their profits as their income, and is subject to a lower tax rate. Additionally, the business owner is able to claim certain business expenses on their personal income tax return, further reducing the amount of taxes owed.
Taxation Requirements
While there are some advantages to owning and operating a sole proprietorship, such as avoiding double taxation, there are also some taxation requirements that must be met.
As a sole proprietor, you must register an income tax number with SARS and provide details of your business activities. You will also be required to submit an annual tax return, which must include details of your income, expenses, and any other deductions that may apply.
In addition to income tax, sole proprietorships may be required to pay other taxes, such as Value Added Tax (VAT), Capital Gains Tax (CGT), and Employees Tax (PAYE). These taxes are all levied at different rates and are based on the type of activity that the business is engaged in. For example, businesses that generate income from the sale of goods or services may be liable for VAT, while businesses that purchase and sell investments may be liable for CGT.
Sole proprietors are also responsible for the payment of any employee taxes, such as PAYE and UIF. This is calculated based on the employee’s salary and is paid to SARS on a monthly basis. The employer must also register the employee with SARS and provide the employee with a tax certificate in order to deduct any taxes that may be due
Sole proprietors must also pay tax on any dividends or profits that are earned from their businesses. It is important to note that any capital losses may be offset against any capital gains, meaning that the overall tax burden may be reduced.
Some FAQs
Can I use my personal account for business in South Africa?
Sole proprietors pay provisional tax and are not legal entities. However, they are recognised in South Africa as a form of business. For this reason, a sole trader can open a personal account and use it for business since the owner and the company cannot be separated.
How much must a business make to pay tax in South Africa?
Qualifying businesses will declare and pay one (1) tax (unless with a VAT or PAYE option) and only start paying tax when their annual turnover exceeds R335 000. A small business that is registered for Turnover Tax can choose to register for VAT as well.
The question then is…Is it better to be a sole proprietor or a company in South Africa?
At lower levels of taxable income, it is far more tax-efficient to operate as a sole proprietor and enjoy the benefits of sliding tax tables and rebates available to individuals. At higher income brackets and as you start to earn more, it’s likely that company registration would be better for you.
Do small businesses pay tax in South Africa?
Turnover tax is a simplified tax system for small businesses with a qualifying turnover of not more than R1 million annually. It is a tax based on the taxable turnover of a business and is available to sole proprietors (individuals), partnerships, close corporations, companies, and co-operatives.
Who gets the profits in a sole proprietorship in South Africa?
It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses, and liabilities. You do not have to take any formal action to form a sole proprietorship.
Some advantages
- Simple to establish and operate
- The owner is free to make decisions
- Minimum legal requirements
- The owner receives all the profits
- Easy to discontinue the business
Some disadvantages
- Unlimited liability of the owner
- The owner is legally liable for all the debts of the business. Not only the investment or business property but any personal and fixed property may be attached by creditors. The owner signs contracts in his or her own name because the sole proprietorship has no separate identity under the law.
- Limited ability to raise capital. The business capital is limited to whatever the owner can personally secure. This limits the expansion of a business when new capital is required. A common cause for the failure of this form of business organisation is a lack of funds. This restricts the ability of a sole proprietor (owner) to operate the business effectively and survive at an initial low-profit level, or to get through an economic “rough spot”.
- Limited skills. One owner alone has limited skills, although he or she may be able to hire employees with sought-after skills.
A second article will provide examples of taxation based on lower income versus higher income levels (i.e. personal tax versus company tax).