Hello Everybody,

Terence had requested that I write something in terms of setting up a business in the most tax efficient way and the different options in terms of setting these up.
We all know that is no getting away with paying Taxes. This is a great idea and thus the reason for this topic.
One can start a business under your own name. In this case, you would be a sole proprietor. A sole proprietor is a person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses; a sole trader.
Another option would be to open up a company and you would pay taxes at the company tax rate of 28%. The salary or drawings that is paid to yourself as an “employee”, will be taxed at the PAYE rate based on the Tax tables for that specific year.
You could open a Small Business Corporation, which has a list of requirements and a different set of tax tables.

I am going to focus on the advantages and disadvantages of a sole proprietary and a company (Pty Limited)

Advantages of a sole proprietary

  • Simple to form
  • No formalities required

Disadvantages

  • The sole Proprietor’s personal assets which are unrelated to the business are  subject to claims of business creditors.
  • A sole proprietorship gives the least protection because the personal liability of the sole proprietor.
  • The proprietor carries the full risk of failure and this can result in sequestration (a process where the assets of the debtor are taken by a trustee to be distributed between creditors) of his or her personal estate.
  • Perpetual existence is not possible. If the owner dies the proprietorship comes to an end.

Lets look at the Advantages and Disadvantages of a Company

  • Subject to many legal and compliance requirements. Formal registration process with Companies and Intellectual Property Commission (CIPC).
  • A Private Company must have at least one shareholder. This can be a foreign entity or another Pty Ltd or Close Corporation.
  • Must have at least one director.
  • A Private Company’s Memorandum of Incorporation should restrict the right to transfer its shares, and prohibit any offer to the public for the subscription of any shares or debentures of the company.
  • Cannot be listed on the stock exchange.
  • The voting rights of shareholders of a Private Company must be determined by the Memorandum of Incorporation which governs the types of shares the company can issue.
  • Certain Private Companies have to have their Annual Financial Statements audited.
  • An Annual Return would need to be submitted to CIPC reporting annual Turnover.

Now let’s compare the two, using a simple example

Company Z makes a taxable income of R200 000.

Taxable Income R200 000
Tax @ 28%(R56 000)
Net Profit R144 000

There would also be Dividends Tax @ 20% on the net profit R28 800. Dividends would kick in when the company distributes that profits to the shareholder.

Effective tax rate = R56 000 + R28 800 =R84 800/R200 000 = 42.4%

Mr X, in his sole proprietary has a taxable income of R200 000. His tax payable would be calculated on a sliding scale. He would receive the rebate.
His tax payable would be R200 000 @18% = R36000 less rebate (R15 714) = R20 286
Mr X effective tax rate is thus R20 286/R200 000 = 10.14%

Surely the sole proprietary pays much less tax in this instance

Lets say the business grew and the taxable income is now R1 500 000 and Mr X obtains a
salary of R40 000 per month

Turnover                                                                 
R1500 000
Salary(R480 000)
Taxable Income R1020 000
Tax @ 28%R285 600
Net ProfitR734 400

Dividends Tax – any pay-outs in future R734 400 @ 20% = R146 880
Mr X will also pay individual tax on the salary he receives, which is
Taxable Income = R480 000
R110 739 +((R480 000- R467 500) x 36%) = R117 993 – R15 714 = R99 525
Total tax that Mr X pay through Z Company and his personal tax = R385 125

Mr X in his sole Proprietary will pay on a R1 500 000
Tax is therefore = R229 089 + ((R1 500 000-R782 200) X 41%)) = R523 387 – R15 714 =
R507 673. 
What this shows is as the business grows, the more one will pay tax as a sole proprietary. At lower income level, it is beneficial to be a sole proprietary. One needs to access the business strategy and forecasts prior to making the decision.

There is also the option of a Small Business Corporation (SBC). Tax tables for a SBC are different and on a sliding scale as follows:
Years of assessment ending on or after 31 March 2023:

Taxable Income (R)
 Rate of Tax (R)
1 – 91 250 0% of taxable income
91 251 – 365 000 7% of taxable income above 91 250
365 001 – 550 000 19 163 + 21% of taxable income above 365 000
550 001 and above 58 013 + 27% of the amount above 550 000

Years of assessment ending on any date between 1 April 2022 and 30 March 2023:

Taxable Income (R)
Rate of Tax (R)
1 – 91 2500% of taxable income
91 251 – 365 0007% of taxable income above 91 250
365 001 – 550 00019 163 + 21% of taxable income above 365 000
550 001 and above 58 013 + 28% of the amount above 550 000

Financial years ending on any date between 1 April 2021 and 31 March 2022:

Taxable Income (R)
Rate of Tax (R)
1 – 87 3000% of taxable income
0% of taxable income7% of taxable income above 87 300
365 001 – 550 000 19 439 + 21% of taxable income above 365 000
550 001 and above 58 289 + 28% of the amount above 550 000

The requirements of a SBC are as follows:
• Must be registered as a company
• Made a turnover/Gross profit of not more than R20 million in the previous financial year
• No shareholders own any other companies oe co-operatives either themselves or through a
bank or unit trust
• Not more than 20% of the income is derived from Investment Income
• Cannot employ more than 3 people, that is not a shareholder or connected person
• The business should not be a personal service provider
• Not derive income from one client

I know that this was a long read but I wanted to draw a picture of the different options and will unpack SBC in the posts to follow.

I hope I didn’t bore you too much :). If you require assistance in terms of setting up a business and the related accounting, you can refer to our services page. Services – D Squared Solutions

Take care