Checklist for starting a business

Starting a business

Starting your own business does not have to be a daunting venture, and following a checklist means it is actually simpler than you may think. This is according to Lana Visser, a financial planner at Fiscal Private Client Services, who highlights some of the factors to consider when getting started.

Be clear on what type of business it is

“Starting with the end in mind is always a good idea. Ask yourself how you want to run your business when you start, but also how you would like it to continue, and what you wish to achieve further down the line. If you plan to work in the business on your own, then you can trade as a sole proprietor. Alternatively, if you are embarking on this journey with a partner or partners, then you may want to consider registering a company. Each has its own benefits and disadvantages, the key is finding the one which meets most of your needs,” explains Visser.

Legal matters

Sole proprietor: A sole proprietorship is fairly easy to start in that no formalities are required in order for the business to start operating unless certain licences are required for trading. “It is therefore not a separate legal entity, and the owner and business are seen as one. This is the case for all assets and liabilities, as well as for tax purposes. While this is the simplest entity type, it can pose a great risk for the owner if debts are incurred and the business is unable to repay them,” highlights Visser.

Partnership: As with a sole proprietor, a partnership is also not a separate legal entity. “All partners are held jointly and severally liable for the business and its associated risks. There are measures and agreements which can be put in place to limit the liability of the partners, but it cannot be eliminated completely,” says Visser.

Companies: A company is a separate legal entity. All assets owned by the company do not belong to the directors and shareholders and vice versa. “This therefore provides some protection in terms of liability should the business venture be unsuccessful. There are, however, some circumstances where the directors or shareholders can be held liable for any losses, but this would be in cases of reckless trading or fraudulent activity, etc.” she says.

Tax consequences

Sole proprietor: As a sole proprietor, the profits made from your business activity is included in your personal taxable income. Visser explains that your business therefore will not have its own tax registration number and a separate tax return will not be required. “Various deductions are available for the expenses incurred in the running of your business and all rebates and exclusions available to you as an individual will still be considered. If your business affairs are not complicated, this entity type can be quite advantageous from a tax point of view due to the simplicity of the tax return and the exclusions available to you as an individual.”

Partnerships: In the same way as a sole proprietor is treated for tax purposes, a partnership is also not registered for tax and a separate tax return for the business is not required. Visser explains that instead, the business’s taxable income is calculated by deducting the expenses from the revenue and various adjustments are applied. The final figure is then split amongst the partners according to their profit-sharing ratio. Each partner then declares this amount in their personal tax returns.

Companies: Companies are separate entities for tax purposes and is required to be registered with SARS. Visser details that most companies are taxed at a flat rate of 27%, “but there are some exceptions to this. If a company qualifies as a Small Business Corporation (SBC) or a Micro Business, then different tax rates apply. A SBC, for example, pays tax calculated on a sliding scale if certain requirements are met and their gross income does not exceed R20 million for that year of assessment. A micro business also pays tax according to a sliding scale, but the tax is calculated on their taxable turnover and no expenses are taken into consideration. The business will also need to meet a number of requirements and its qualifying turnover must not exceed R1 million.”

Succession planning

It is important to consider if you want your business to continue when you are no longer around. Visser says that questions such as, ‘do you have children who may be interested in the business, or would you simply like to leave a legacy for them to earn an income from when you pass away?’ should be considered. Sole proprietorships and partnerships do not offer the advantage of perpetual succession – when you or one of the partners pass away, the business ceases to exist, and all contracts entered into with the business is terminated.

Visser confirms that a company, being a separate legal entity, has this advantage. If a director or shareholder retires or passes away, the company along with all of its contractual benefits and obligations remain in place. “The business relationships with third parties are with the company itself and a change in the directors or shareholders will have little to no impact on those relationships. There are various factors which influence what will happen to one’s shareholding on death, but the necessary agreements can be put in place for this eventuality.”

Visser counsels that when starting your own business, there are a number of factors to consider to ensure that your business is setup and run in the most practical and effective way for your situation. “As always, it is best to do the research and to consult the necessary tax and legal professionals to assist in making an informed decision.”

For more information reach out to a Lana at [email protected] or see www.fiscal.co.za