SMEs and Tax: what to consider before registering your business

However, the decisions entrepreneurs make from the outset will have lasting consequences.

Businesses, in general, benefit from a lower tax rate than private individuals. Small businesses are typically liable for three types of tax: turnover tax, value added tax (VAT) and an employee tax, comprising Pay-As-You-Earn (PAYE) and Unemployment Insurance Fund (UIF) contributions. However, the tax implications differ from business structure to business structure.

Sole Proprietorships

Sole proprietorships are considered informal enterprises, which are owned and operated by natural persons. There is no distinction between the entrepreneur’s personal and business assets. As such no separate tax registration is required and sole proprietors are taxed at their own personal tax rate, which may be higher or lower than the corporate tax rate.

Partnerships

Partnerships are also considered informal entities in which two or more persons agree to carry-out a trade, business or profession. Like sole proprietorships, partnerships are not recognised as separate legal persons or taxpayers and each partner is taxed, per individual tax rate, on their share of the business profit.

Private Company, Personal Liability Company and Close Corporations

Private companies, personal liability companies and close corporations are recognised as standalone legal entities. Once registered with the Companies and Intellectual Properties Commission (CIPC) via the CIPC or Nedbank SwiftReg®, these companies automatically receive a registration number from the South African Revenue Service (SARS). The businesses are taxed on their profit and business owners are taxed separately in their personal capacity.

Some businesses, depending on structure of their structure and the nature of their activities, may be also liable for income tax, capital gains tax and/or dividends tax. These taxes are waived for micro enterprises, defined as businesses with turnover less than R1 million, in favour of an all-encompassing turnover tax. The turnover tax, which requires less onerous record keeping, is calculated by applying a tax rate to the taxable income of micro enterprises. There are also tax relief measures for companies that qualify as small business corporations.

Alan Shannon, head of relationship banking sales at Nedbank, advises entrepreneurs to consult professional advisors for assistance in determining the tax implications and consequences specific to their own business.

“You need to engage with people that you know you can trust and that have some sort of a track record. Try to understand what other businesses that business advisor has worked with and do not be afraid of asking the business advisors for the contact details of those businesses so that you can engage with those businesses and see what value those business advisors have added to them,” he said.

Aside from tax, potential entrepreneurs must also consider personal liability when deciding upon an appropriate business structure. “If you trade as a proprietary limited company, you remove yourself from a personal liability point of view because when the company makes a commitment, it is between the company and the whoever it is they are doing business with so. If the company doesn’t make its commitments then the company may be sued,” he explained.

Shannon also pointed to resources such as Nedbank’s Essential Guide for Small Business Owners and SimplyBiz portal for guidance related to tax and liability matters.

Whether you are starting a business, running an established business or looking to expand, you need a reliable, affordable banking partner who understands the challenges of your business and responds with flexible solutions to your needs. Nedbank has extensive experience in serving small businesses and offers a comprehensive suite of payment, investment and finance solutions, as well as industry specialisation and services that extend beyond banking. Why not contact one of Nedbank’s small business experts to help you see money differently and take your business to the next level? Call 0860 116 400, email SmallBusinessServices@nedbank.co.za or visit www.nedbank.co.za/business for more information.