How to Start A Sole Proprietorship In South Africa
What is a Sole Proprietorship?
A sole proprietorship, also known as a sole tradership, individual entrepreneurship or proprietorship, is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity.
How to Start A Sole Proprietorship In South Africa
1. Choose a business name
To begin, you need to come up with a business name. Brainstorm a few different names that are unique and succinctly describe your business. You can also have your business name be the same as your personal name we’ll discuss more in the next section.
Once you have some business name ideas, check the United States Patent and Trademark Office (USPTO) to see if they’re available. Once you find an available business name you like, you can move onto registering your business name.
2. Register your business name
Sole proprietors have two options when it comes to a business name. Your business name can be the same as your personal name or you can file your business under a different name.
You’ll need to use a fictitious business name or a “doing business as” name (DBA) if you don’t want to use your personal name for your business.
DBAs aren’t required in most states, however, they come in handy when you open a business banking account or business credit card since these institutions require you to separate your business and personal finances into two different categories.
Each state, county, and municipality has different DBA requirements and registration processes. You can check local government offices and websites for more information about registering your business.
3. Purchase a website domain name
Once you’ve settled on a business name and have registered it with your state, it’s time to purchase your website domain name. Your domain name is what identifies your site. It looks something like this: www.example.com.
It’s best to set your domain name as the same name of your business to avoid any confusion. If the domain name you want isn’t available, come up with a variation that is still similar to your business name. It’s alright if you’re not ready to build your website just yet. You can still reserve your domain to ensure no other business takes it.
4. Obtain a business license and other permits
It’s crucial that you’re doing everything by the book and obtain all the appropriate business licenses and permits. Without the appropriate licenses or permits, you risk incurring hefty fines.
Licenses and permits will depend on the nature of your business and which state and local area you’re operating in. For example, health and safety training is required if you’re opening a daycare. Likewise, a health department permit is required if you want to prepare or serve food.
5. File for an employer identification number (EIN)
In most cases, your Social Security number will serve as your tax ID number. However, you’ll need an employer identification number (EIN) if you decide to hire employees or set up a retirement plan. An EIN is what you provide to the Internal Revenue Service (IRS) when you file your taxes. Obtaining your EIN is a free, easy process that can be done on the Small Business Administration’s website.
6. Open a business bank account
Even though revenue from your business is passed directly to your personal income, it is recommended that you separate business expenses from your personal expenses.
Having a business account allows you to accept credit card payments and written checks, plus it gives you the ability to build a credit history for your business.
A separate business account also lets you clearly show the IRS profits and losses. The first few years of your business may incur losses. A separate business account details expenditures like office space, business travel, and banking fees so you can write them off on your taxes.
7. Get insurance coverage
As mentioned, a sole proprietorship means you have unlimited liability if your business goes bankrupt or someone decides to take legal action against you. Additional insurance coverage can limit the risks and give you some protection against these scenarios.
Depending on the nature of your business, you’ll want to look into the following types of insurance:
- Property insurance
- Liability insurance
- Auto insurance
- Health insurance
- Disability insurance
Getting insurance may seem like a large expense. However, you’ll be protecting your personal assets if you ever encounter an unfavorable situation. You can look into different types of insurance coverage on the Small Business Administration website.
Frequently Asked Questions (FAQs).
Does a sole proprietor need to register with CIPC in South Africa?
CIPC registers Companies and Co-operatives. It is not necessary for all businesses to formalize by registering with the CIPC. For some businesses, such as informal businesses and sole proprietors, there may not be sufficient benefits.
What are the legal requirements for a sole proprietorship in South Africa?
The sole proprietorship is not a legal entity. The business has no existence separate from the owner who is called the proprietor. The owner must include the income from such business in his or her own income tax return and is responsible for the payment of taxes thereon.
Can I use my personal account for business in South Africa?
Sole proprietors pay provisional tax and are not legal entities. However, they are recognized in South Africa as a form of business. For this reason, a sole trader can open a personal account and use it for business since the owner and the business cannot be separated.
Do I need to register my small business in South Africa?
For every new business established, you are required to register with your local SARS office to obtain an income tax reference number. Registration must be done within 60 days after starting operations by completing an IT77 form, available at your local SARS office or from the SARS website.
How much must a business make to pay tax in South Africa?
Qualifying businesses will declare and pay one (1) tax (unless with a VAT or PAYE option) and only start paying tax when their annual turnover exceeds R335 000. A small business that is registered for Turnover Tax can choose to register for VAT as well
Is it better to be a sole proprietor or a company in South Africa?
So at lower levels of taxable income, its far more tax efficient to operate as a sole proprietor and enjoy the benefits of sliding tax tables and rebates available to individuals. At higher income brackets and as you start to earn more, its likely that company registration would be better for you.
Do small businesses pay tax in South Africa?
Turnover tax is a simplified tax system for small businesses with a qualifying turnover of not more than R1 million per annum. It is a tax based on the taxable turnover of a business and is available to sole proprietors (individuals), partnerships, close corporations, companies and co-operatives.
How much do you need to earn to pay tax in South Africa 2021?
R87 300 if you are younger than 65 years. If you are 65 years of age to below 75 years, the tax threshold (i.e. the amount above which income tax becomes payable) is R135 150. For taxpayers aged 75 years and older, this threshold is R151 100.
What income is not taxable in South Africa?
Who is exempt from income tax in South Africa? Generally, if you earn less than R83,100 annually (less than R128,650 if you’re older than 65, or less than R143,850 if you’re over 75), you don’t have to pay income tax.
Who gets the profits in a sole proprietorship in South Africa?
It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities. You do not have to take any formal action to form a sole proprietorship.