Most entrepreneurs start off as Sole Proprietors, running and operating their business as an individual. At some point, however, it may make sense to formally register your company with the Companies and Intellectual Property Commission (CIPC).
What are the main benefits of operating as a private company?
- Perpetual business
A corporation typically “lives” separately from its founder(s), shareholders, and employees. In other words, regardless of individuals involved in the business quitting, retiring, or even passing away, the business entity will still exist. The primary benefit of perpetual existence, sometimes to referred to as “perpetual succession,” for a corporation is that shareholders and investors know that the company will not simply disappear due to unforeseen circumstances.
- Limited liability to shareholders
Shareholders have limited liability, that is, they are generally not responsible for the liabilities of the company. However, certain tax liabilities do exist. Every shareholder and director who controls or is regularly involved in the management of the company’s overall financial affairs shall be personally liable for, amongst others, PAYE, VAT, additional tax, understatement penalty, penalty or interest for which the company is liable if the taxes have not been paid to SARS within the prescribed period.
- Transfer of ownership of shares
It is allowed to transfer ownership of shares in the company. A share in a company consists of a bundle of personal incorporeal rights against the company. These bundles of rights are “transferred” by way of cession and it is possible for rights against the company to “transfer” at different stages between the Seller and the Purchaser.
- Tax benefits
When you operate as a Sole Proprietor, you will be taxed at a personal income tax rate of between 18% – 45% whereas the Corporate Income Tax rate is 28%. In cases where your company qualifies as a Small Business Corporation (when your turnover is less than R20mil per year you can contact us to find out if you qualify), you won’t have to pay tax if your profit does not exceed R87,300 and as little as 7% when your profit ranks between R87,300 and R365,000. 21% tax is payable on an income between R365,000 and R550,000 and a maximum tax rate of 28% is payable when your profit exceeds R550,000. There are also various company expenses that can be deducted for tax benefits. You can contact us for proper tax planning for yourself and your company.
A Private Company is required to perform lesser legal formalities as compared to a Public Company. It enjoys special exemptions and privileges under the Company Law. Therefore, there is greater elasticity of operations in a Private Company. For example, in most cases no auditing is required.
- Protecting IP (Intellectual Property)
A Private Company is not required to publish its accounts or file several documents. Therefore, it is in a better position than a Public Company to maintain business’ trade secrets or Intellectual Property (IP).
Registering the business means that your corporate identity is protected, no one will steal your business name. Other people can steal your business name, register it then sue you for using it. It’s best that you register your business and trademark your logo.
- Business bank account
Registering a business allows you to have a business account. This is where all the business finances go. It makes it much easier to manage the finances when they are not mixed up with your personal finances, it also makes you that much more responsible. Another advantage is that you get to give your clients your business account name for deposits, which makes you seem more professional.
If you are unsure whether to register your business, please feel free to contact us. We will be able to guide you in what type of company to register, do all necessary company structuring as well as comprehensive tax planning. We also manage the entire registration process with CIPC and SARS or can make changes to your current company if needed.