Smaller business options

Different business vehicles are taxed in different ways, which should guide your vehicle choice before you start up.

Smaller businesses are easy to control and manage profitably, but there are many business vehicles for a variety of enterprises in South Africa. Sole proprietors operate as an entity in their own name, with a personal VAT number and all assets and liabilities on their own account.

Partnerships have one or more people operating together, with VAT registered as a partnership. Many family businesses are run like this. A company business can be anything from a large listed company with shares traded on the stock exchange, to a smaller close corporation.

Trusts, which are more uncommon, are used for business purposes and cooperative societies. Realising how prohibitive barriers to small business ownership are, authorities recently brought new rules into the marketplace to facilitate start up and small business.

The small business corporation (SBC)
The SBC is a close corporation or a private company. It can’t be owned by a trust – if it was, a family could have many such vehicles, enabling it to split income and avoid tax altogether! Income splitting is the only way to legally avoid tax.

Each person can only be member of one SBC – a four-member family could have four SBCs. They’re taxed favourably, and can be VAT registered – making them suitable for firms that require VAT registration. Where a family business is capable of division, naming each division as an SBC is good tax planning.

SBC owners will also be drawing salaries. Personal drawings are taxed at a sliding scale. The sum of the taxes paid by, for instance, four family members who each have one SBC will be less than tax payable in one entity upon the same income.

The first R100 000 of an SBC’s taxable income isn’t taxed. Add to that the individual threshold and the SBC begins to look very attractive.

The micro business

Because they can’t be VAT registered, micro business vehicles suit businesses that don’t have high VAT inputs.

It pays tax upon the turnover that it produces, so the business operator doesn’t need to keep records or do much accounting, making this setup ideal for the home business or smallholder, especially where overheads are low.

In a firm where overheads are high, this vehicle isn’t ideal because, as noted before, tax is payable on turnover with no regard for the liabilities – so, even an entity operating at a loss is liable for tax under such a regime.

Unfortunately, professional people, like doctors, lawyers or accountants can’t operate as micro businesses, despite the fact that many of them run a single person practice, which makes it hard to comply with the tax rules imposed. Revenue authorities exclude such activities, classifying them as “personal services.”

Trusts can’t be micro enterprises, but close corporations and companies can be.