Starting a business is an exciting journey. And at some point, every founder will be faced with the decision to formally register their business or not. Unfortunately, most people are unsure as to why, where and how to do so. This guide will give you a short description of the benefits and process of registering a business.
But first, some basics.
It’s important to note that it is not a legal requirement for all businesses to be registered, specifically those that intend to operate informally, are just starting out and not making much revenue, or intend to remain sole proprietors/simple partnerships. A “sole proprietor” is a single individual that runs and operates the business in their personal capacity, whereas a “partnership involves two or more people running the business (and sharing in its profits and loss). In both of these instances, the business is operated under the owner’s name and cannot be separated from individuals involved, who assume personal responsibility for the outcomes of the business (legal, tax and other).
However, given that most people start their businesses with the intention of staying competitive in the formal economy, attracting a wide array of customers, remaining compliant, possibly raising funding, and have hopes of making substantial revenue, it’s important to cover the advantages of formally registering a business for these purposes.
When you “register a business”, you are formally listing your company with the CIPC (South Africa’s Companies and Intellectual Property Commission), the regulator of company legislation in SA. Registering your company means that you enjoy the rights, and benefits that an unregistered business or individual does not.
A business that successfully registers with the CIPC is then referred to as a Private Company, and usually ends with “Proprietary Limited” in its name, or (Pty) Ltd for short. Once done, the business is recognised by South African law as a separate legal entity. The company must then also be registered with SARS as a taxpayer (unlike in the case of a Sole Proprietor, who pays tax on income as if it was earned in their individual capacity).
There are a few select reasons why you may choose not to register your business.
Registration is not always justified if you intend to trade informally, are just starting out and are pre-revenue, or have tax advantages to staying unregistered (although this is rare for a growing business). Also, certain businesses may not earn the revenue required to benefit from certain tax breaks afforded by the Government. Then there’s the general “feeling” that operating as an informal trader or sole proprietor is more “hassle-free”, involving less administration and lower cost than in a formal company. Outside of the technical considerations that go into this decision, there’s little point in registering a business that is unlikely to work. It’s recommended that you only consider registering your business once you have sufficient traction (sales, demand or social proof) that your business can take off.
Now let’s be clear, when you formally register a business, it does brings with it certain responsibilities, irrespective of whether the business is trading. There are admin requirements and costs, largely concerned with maintaining the company’s legal status with the CIPC (filing an annual return, with a R100 fee) and additional tax compliance with the South African Revenue Service (SARS). However, in most cases, these requirements are far outweighed by the benefits of being registered.
As standard practice, it’s recommended that when you register your business, you should find an accredited accountant/tax consultant to manage your legal/tax submissions and compliance. The right accountant can be an incredible support to a new business and relieve the founders of the burden involved. And despite contrary opinion, these services don’t have to cost a lot of money. Most accredited accountants can assist new businesses with these requirements for a nominal fee. At getlion, we’ve partnered with brilliant firms to assist our users with just that. Check out the app for more – and do your best to budget for this service, it is well worth it!
So now to the important part, why you SHOULD consider registering your business:
As a sole proprietor or partnership, you are fully responsible for the financial and legal risks involved in operating your business. These include any debts that the business incurs and if the business fails, then it’s likely that your personal assets (even unrelated to the business – like car, home or TV) could be subject to the claims of your business’s creditors. This is a risk in the early stages of your company. When you choose to register a private company, you establish a completely separate legal and financial entity, which formally divides your personal and business affairs and finances. This means that your personal assets cannot be seized by creditors (parties that loaned you money) to settle business debt, unless you personally guaranteed them. To make this separation even clearer, you’re now allowed to create a separate business bank account and you’ll receive a separate tax number for the business.
Firstly, as a sole proprietor operating the business under your own name, you are required to file business taxes on your personal tax return. Even though you may not be registered with the CIPC, you will still have to be registered with the South African Revenue Services and will be liable for tax if your income exceeds the prescribed threshold. In South Africa an individual is taxed on a sliding scale whereby the more they earn, the more their rate of tax will increase. Individual tax is only applicable when people start earning more than R83,100 per annum (known as the basic tax threshold), whereafter they’re required to pay tax of 18% on all income up to R205,900 earned in a year. This increases as income your increases. To understand more about the personal tax brackets, you can visit this link or read more under our tax section. Comparatively, a standard registered company is taxed at a flat rate of 28%, and individuals only start to pay an equivalent tax rate when they earn over R600,000 per annum (circa). On this limited understanding, it would seem proper to remain a sole proprietor for as long as possible.
However, that isn’t the end of the argument. Firstly, as your business grows and you earn more money, registered business can lower their tax burden thanks to a considerable list of tax “deductible” expenses that they can claim from SARS (and be reimbursed for) that are not otherwise applicable to individuals. Then, it’s important to know that individual tax can extend as high as 45% per annum, for taxable income over R1,57m per year. In this instance, sole proprietors earning good income as individuals will pay significantly more tax for their business than in a standard company.
And lastly, it’s important for an individual to understand whether their business (once registered) can qualify as a Small Business Corporation (SBC) – which attracts an even lower level of tax than standard companies and individuals. For example, SBC’s get their first R83,100 income tax free, and only pay 7% in tax on income that they make between 83,101 and R365,000. To understand more about the rates applicable to SBC’s, visit the link here. And if you want to find out if you’re existing business qualifies as a Small Business Corporation, you can use an easy tool from one of our partners, TaxTim, here.
All tax things considered (rates, incentives, deductibles and allowance), it’s important to perform an in-depth analysis and assess whether registering your business will be ideal will be the most beneficial for your situation. We recommend speaking to an accredited accountant to assist if you’re still unsure.
Historically, registering with the CIPC was a complicated process, which led to fewer individuals wanting to do so themselves. Because of this, most business owners would pay consultants or third-party services to assist them. These services typically cost between R800 – R1500, so we recommend avoiding them (unless they include speciality benefits like launching a website alongside, or you’re simply too busy).
Thankfully for most business owners, the registration process is now simple and inexpensive enough to do yourself, thanks to BizPortal. Launched in November 2019, BizPortal is a platform developed by the Companies and Intellectual Property Commission (CIPC) to offer company registration and related services in a simple, digital way. It was developed to improve the ease of starting and doing business in South Africa. With BizPortal, you can register your company for R125, and apply to reserve a company name for R50. The platform meets a host host of other requirements too, including Name Reservation, Tax Registration (yes – your new business is automatically registered with SARS), B-BBEE Certificates for Exempted Micro Enterprises (EME) with Turnover between R0 & R10 000 000, Unemployment Insurance Fund (UIF) Registration and opening a Business Bank Account. Most of which are included in your registration fee, or come at a small fee.
If you’re confident that your business can work and that you have sufficient traction, you expect increased sales and growth, you intend to raise funding or find investors, intend to do business with corporates or government, you wish to create credibility with customers and alleviate personal legal and financial risk, then it makes sense to register officially and formalise your business.