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Tax implications to consider when starting your own business
Johan Swart, Tax Manager at Legal and Tax
16 April 2013

Choose a legal structure that will maximise your income and minimise your tax burden.

One of the most important things to think about when you start a business of your own is what it will mean for your tax affairs. Before you get up and running, you should choose a legal structure that will comply with Sars requirements while helping you maximise your income and minimise your tax burden and personal exposure
to risk, says Johan Swart, tax manager at Legal and Tax. Here are a few of your options:

The sole trader

As a sole trader, you will run your business under your own name. Your profits will be taxed under your personal name and your current income tax reference number, says Swart.

You will be required to make provisional tax payments in August and February, with the option of making an additional payment in September. When you file your tax return for the year, these payments will be deducted against your tax liability as calculated in your annual assessment.

Like any other business, you - as a sole trader - can deduct legitimate expenses from the total taxable income for the year, Swart says. But you must keep accurate records about your income and expenses for at least five years, as well as all supporting documents such as cheques, bank statements, invoices and vouchers.

As a sole trader, you are not subject to an annual audit and you don't need to hire a bookkeeper or accountant to keep your records if you are able to do so yourself. If your turnover reaches R1 million a year, you will need to register for VAT.

A partnership

This is similar to a sole trader, except you are running the business in partnership with someone else, says Swart. Usually, you'll have a partnership agreement in place that governs the running of the business and the sharing of the profits. Sars will tax each partner for their own share in profit in the business. But be aware that this sort of business venture is risky, says Swart. You could be held liable for business debts incurred by your partners.

For example, if you entrust your partner to keep financial records and make payments to SARS, you will also be held responsible if he or she neglects to pay VAT and other taxes and keep accurate records of income or expenses, adds Swart. Sars could hold you liable for payment of outstanding taxes.

Registering a private company

You can register a private company with the Companies and Intellectual Property Commissioner. This will change your whole tax scenario because SARS regards a private company as a legal person with its own tax obligations.

The company will be taxed at a rate of 28% on net profits, Swart says. As a shareholder of a private company, you will be liable for the payment of provisional tax. If you are paid a constant monthly salary by the company, you are also liable for the payment of employees' tax, the same as any other employee. And any dividends (the distribution of profits after the company is taxed) paid to you will be subject to a 15% withholding tax.

"Registering a company and trading as a separate legal entity offers you and the other shareholders some protection against personal liability should things go wrong," says Swart. "But SARS can still hold shareholders and directors responsible for tax debts the company might accrue such as VAT and employees tax."

Registering a company for trade purposes is complicated and you should seek professional advice before embarking on this route. Running a company is also expensive because of the legal requirements. Both SARS and the Companies Act will have stringent audit requirements and your financial records must be prepared by a qualified accountant.

Small business corporations

If Sars recognises your business as a small business corporation, you will be taxed at a special reduced rate. You will also be allowed to depreciate certain assets used for manufacturing at a rapid rate, offering significant tax benefits. But you will need to meet a long list of requirements to be considered a small business corporation:

Your business must be a registered close corporation, co-operative or private company. It must have a turnover below R 20 million.
None of the shareholders may have interests in any other companies.
All of the shareholders must be natural persons.
The company cannot derive income from investments or services.


The reason for these exclusions is that SARS wants to benefit small businesses that create employment and stimulate local manufacturing. The regulations are also meant to prevent situations where a big company is divided into small subsidiaries to avoid the turnover limitation.

Closing words
Registering a company for trade purposes is complicated and you should seek professional advice before embarking on this route. Running a company is also expensive because of the legal requirements. Both SARS and the Companies Act will have stringent audit requirements and your financial records must be prepared by a qualified accountant.

* This report was prepared by Johan Swart, Tax Manager at Legal and Tax.