Operating as a Sole Proprietor VS a Private Company

May 24, 2020
Business

For some interesting reason we, South African entrepreneurs all believe we need to register a company before we can start operating as a business. But this is not always the best idea.

Starting your own business can be very daunting. Whether you decided to quit your full-time job to pursue your dream or whether you were retrenched and had no choice but to start making a living of your own, the first few steps on your own is very new and very far out of your comfort zone.

During this time you will have to make a few decisions. One of the decisions you will have to make is what type of entity you would like to trade as. In South Africa you have a few options:

  • Sole Proprietor
  • Partnership
  • Closed Corporation
  • Private Company
  • Public Company
  • NGO or non-profit
  • Franchise
  • Trust

Today, if you are starting a business with the intent of raising a profit and sustaining your income, you would most probably consider either operating as a sole proprietor or a private company. If you have a friend or colleague that want to operate with you, you can also consider a partnership. But how do you decide?

A lot of people will tell you that you must register a private company for people to take you seriously, but there are many reasons why it is easier and better to trade as a sole proprietor or as a partnership, or at least until it is necessary to register a private company.

When you are only one person offering a service or product, my first recommendation would be to operate as a sole proprietor. If you are two people offering a service or product, the ideal first step would be to start a partnership and to consider registering a company only once the business has grown a bit. However, should the business be a very risky business I would recommend registering a private company from the start.

The big difference between operating as a sole proprietor or partnership compared to operating as a private company lies in your liability when it comes to business assets and liabilities.

When you operate as a sole proprietor or partnership, you have the benefit of not having to go through a lot of formalities, no formal registration is required, you have certain tax benefits that you do not have as a private company, however you are personally liable for all business operations - contracts are in your personal name and should the business fail it is not separate from your personal finances, you will personally be liable for any debt incurred for example.

This is why my recommendation would be to rather register a private company should the business be very risky as you have no personal liability in a company, your personal assets and liabilities are separate from your company assets and liabilities. Should the company be liquidated for example, your family home is safe and can not be taken by the bank to cover company debt. However be careful that you do not list any of your personal assets as surety for any company loans.

The important things to consider when deciding what business entity to operate as, is

  1. Your business profitability - what form of business entity is the cheapest and yields the most tax benefits.
  2. Is it necessary to split your personal assets and liabilities from that of the business.

Should you decide to operate as a sole proprietor, a partnership or company, you will now be liable for your own taxes which is very different from being full-time employed and paying PAYE (Pay-as-you-earn) taxes. One of the big differences is that your tax is not subtracted from your income before you receive it, which means you should probably open a second bank account where you can keep this money safe to ensure you do not spend this money due to SARS, so that when the time comes to submit your tax returns that you have enough money to pay to SARS, otherwise SARS will penalise you.

It is however important to note that there are a lot of tax benefits when you work for yourself, it is definitely worth contracting an accountant to assist you with your tax as you can save a lot of money if you work smart - nothing illegal though!

If you require assistance on deciding what type of business entity to consider for your business, or if you require assistance on your taxes, contact the Nyfti team for assistance.

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Marilie La Grange
CEO of Nyfti Solutions

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