Starting a new business?

With the worst of the recession seemingly behind us, many South Africans are considering starting new businesses. There are a variety of reasons for this, ranging from retrenchment to bargain spotting, but regardless of the reason, the importance of getting the structure right from the beginning cannot be underestimated.

History shows that for the budding entrepreneur, and or partners, the most popular choices are usually a close corporation (CC) or a company. 

Once the new Companies Act comes into force, which will probably be later this year, close corporations will not be entirely phased out: existing close corporations will remain. However, it will not be possible to form a new close corporation.

The idea behind close corporations when they were first introduced in 1984 was to establish a more flexible and cost-effective vehicle for smaller businesses.  The new Companies Act looks set to achieve these same goals for smaller companies, especially in the case where the shareholders of a company are also all directors.

In the case of such an entity, a company will become the vehicle of choice in the future.

From the point of view of taxation, there is practically no difference between the treatment of close corporations and companies. In fact the definition of ‘company' in the Income Tax Act includes a close corporation.

Where the turnover of the company is under R14m per annum and various other requirements are met, the company will qualify as a ‘small business corporation', benefiting from lower income tax rates and concessions on capital allowances.

One question that many may ask is why it is necessary to incorporate a smaller business undertaking at all?  Why could such an enterprise not be conducted as a sole proprietorship or a partnership?

The main reason is limitation of liability.  By incorporating, a separation is achieved between the investor's private assets and those of the business vehicle.  Therefore, unless the directors or members trade recklessly or contravene other provisions of the Close Corporations Act or the Companies Act, their personal assets will not be open to attack by virtue of the activities of the business.

Various problems associated with partnership law in South Africa make partnerships an unattractive choice.  One of these problems is that each time a partner enters the partnership or a partner retires, from a legal perspective the partnership comes to an end.  Amongst other issues, this creates uncertainty from the perspective of taxation.

One should also note that the tax advantages of a ‘small business corporation' as referred to above, are not available to sole proprietorships or partnerships.

If one is taking over an existing concern, it is generally sound advice to purchase the assets out of the existing close corporation or company rather than to purchase the members' interests.  The most important reason is that there may be undisclosed creditors lurking in the entity. A further reason is that if one finances the purchase of the assets, one could get a tax deduction for the interest on productive assets but not for the purchase of the members' interests.

Starting or buying an existing business is often a difficult decision, fraught with many worries, uncertainties as well as excitement and expectations.  Registering the entity under the best structure is the first, most vital decision to make to ensure the future success of the business.  If a person is uncertain of the parameters or requirements then they should seek the advice of a business strategist or their accountant.

*David Warneke is from Cameron & Prentice

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responses to this article

C***! You try and secure credit without signing suretyship! There is NO valid reason not operate as a Sole Proprietor. by GungetsTuft on May 25 2010, 08:37 Find this comment inappropriate? Report it

How do you open a pty? Is there an easier way than CIPRO? by Dave on May 25 2010, 08:50 Find this comment inappropriate? Report it

Be constructive @ Gungets Tuft Your ignorance is all too evident. Tax is a major advantage (as discussed above), OTHER creditors..... (the bank is not the only person you deal with - well I hope for your sake not) And did you agree to signing every single asset as . .more surety? #wiseman. Hope this helps. . .less by Rowan on May 25 2010, 10:00 Find this comment inappropriate? Report it

@Rowan I don't have the energy to argue with a fool. I've been in business for 30 years - how about u? Seems you are selling a cc or pty on the same basis as those crooks who smouse RA's - telling ppl that it has an advantage where tax is concerned. Those of us . .more in the know, realise that this is unadulterated sh!te. . .less by GungetsTuft on May 25 2010, 15:24 Find this comment inappropriate? Report it

Do as you please - @GungetsTuft Do as you please. Just because you have been in business for 30, does not make you a guru on recent tax, legal and accounting amendments. It rather shows your inflexibility to take a little advice, firstly from David, and secondly myself. Age . .more is a weakness sometimes! But at the end of the day, its your life and your business. I could not care. Sorry to i could not help you :) . .less by Rowan on May 25 2010, 16:33 Find this comment inappropriate? Report it

Registration of (Pty) Ltd's/CC'S in SA Dave, there are service providers like SA Corporate Registrations (Pty) Ltd in Cape Town who provide registration services to Auditing,legal practices and the SA public as a whole for shelf or new (Pty) Ltd's or CC registrations. Their costs are R 378 for . .more a new CC and R 650 for a shelf (Pty) Ltd. They also offer VAT, PAYE, UIF registrations. They are available on 0860-VATREG should you wish to contact their office or get a pricelist. I suggest you give them a try if you want to register an entity in SA as you get professional advice with all the other registrations like VAT etc. . .less by Chris on May 25 2010, 17:48 Find this comment inappropriate? Report it

Startmeup 50% of small businesses fail within the first year or two. If therefore the enterprise is an incorporated entity such as a CC the losses are retained in the CC. Whereas if we start as a sole prop losses can be offset against future income from any . .more source. If after a year or two ( or even in year one) we start making profits we could, if we choose to, then trade as an incorporated entity. Rowan - 99% of advice on the net is presented by vested interests. Taxrelief.co.za has some basic info. . .less by Roger on May 25 2010, 18:34 Find this comment inappropriate? Report it

Incorporate? There are advantages to incorporation, both tax and limited liability. Liability can extend beyond your existing creditors - e.g. claims for damage. At least with a cc if a claim does arise in most cases the claimant will be limited to the assets of the . .more cc. Small business corps don't pay tax on the first R 54200 (2010) other than STC which is normally only payable when a dividend is declared. STC is 10% - so the first R 54 200 carries tax @ 10%. That is a tax saving if the business is producing taxable income in excess of this as an individual would pay 18%. The tax saving has to be weighed against the additional administration in keeping the records and submitting returns for another taxpayer. Normally best to start as a sole proprietor and once profits look as if they will exceed R 300 000 p.a. sell to a cc. This can be done tax free through the provisions of section 42. . .less by xrascc on May 31 2010, 11:56 Find this comment inappropriate? Report it

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