How to Make Money Before you Start your Business

How to Make Money Before you Start your Business

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I presented a short talk to a group of entrepreneurs a little while back. My opening question to them involved finding out what vehicle they used to operate their business. The overwhelming majority – in fact every one of them – used a company or close corporation to trade with. In addition, none of them used any of the alternative tax options such as Small Business Corporations Tax or Turnover Tax. I asked the question as to WHY these options were employed and the consensus was that “it was the best thing to do” … but is it really?

Choosing your trading vehicle and tax framework is an important matter. No two businesses and business owners are in the same position – and therefore consideration needs to be given to personal circumstances in order to make an informed decision. I also believe that this decision needs to be taken as early as possible in your entrepreneurial journey because sometimes the decisions taken in the beginning are difficult to be reversed later without additional administration and costs.

Doing business

To simplify matters, I am going to look at some of the high-level strengths and weaknesses of doing business in your personal name as a sole proprietor or partnership versus that of a company. (I will ignore Trusts etc for these purposes – but they do have their place).

Ownership: Sole prop / Partnership

  • Protection from Creditors – No
  • High administrative burden – No
  • Tax advantages – Yes

Ownership: Company/CC

  • Protection from Creditors – Yes (Limited)
  • High administrative burden – Yes
  • Tax advantages – Yes

Tax Framework

Individual

  • Individual – Yes
  • Companies – No
  • SBC – No
  • Turnover Tax – Yes

CC/Company

  • Individual – No
  • Companies – Yes
  • SBC – Yes
  • Turnover Tax – Yes

In short, Companies offer some protection from creditors (but if  you have signed personal surety that protection could be nullified?) Both forms of ownership can also have tax benefits over the other – it just depends on your circumstances.

The crux of the matter here is matching your selected tax framework to your business. In broad terms, the following tax frameworks could be applicable:

  • Personal income tax : The sliding tax scales issued by SARS which taxes net income received by individuals
  • Company tax : Taxable income is taxed at 28%
  • Small Business Corporation Tax : Taxable Income is taxed on a sliding scale from 0% to 28%
  • Turnover tax : Tax is levied on the turnover of the enterprise on a sliding scale. It ignores any costs or expenses incurred

To illustrate the point of choosing a suitable framework please download the example of the implication of different structures and taxes here. The assumption is that the business generates R1m in turnover and a profit of R600k before paying any owner salaries. Owners are then paid a salary of R250k and the remaining profit is distributed via dividends.

As one can see, the effective tax rate that is paid varies from 14% to 28% depending on the structure that is used. Now, this could easily be optimised by taking the time out at the BEGINNING of the enterprises existence as opposed to the end. Had this business elected to use turnover tax upon inception – irrespective of the vehicle (i.e. company vs sole prop) it would have saved at least R25,000.

Existing businesses

There are other considerations to take into account – and certain constraints which may prohibit registration for certain types of tax frameworks and businesses – but my advice is to consult a good tax accountant PRIOR to setting up your business (and then regularly thereafter to review the position) to ensure that you are using an optimal structure for your particular circumstances.

If you already have an existing business, fear not for the proverbial horse has not necessarily bolted. You may elect to register for a different tax framework at the beginning of the next fiscal year provided you meet the requirements of that tax framework.

Feel free to contact us to make an appointment to discuss the most effective structure for your business on info@beadvised.co.za or via our website www.beadvised.co.za

Craig van der Westhuizen
Craig van der Westhuizen qualified as a chartered accountant in 2000. He then spent just short of five years with Imperial in the commercial vehicles sector before leaving the corporate world in 2006 to start his own business. He is currently the MD of Bull’s Eye Advisory Services, a team of entrepreneurs and associates that focus on delivering a range of professional services primarily to the SME market. Bull’s Eye also runs an ‘Entrepreneur Village’ that encourages entrepreneurs to join their premises, which fosters networking and results in more business for everybody. Visit www.beadvised.co.za for more information and to test Bull’s Eye’s free personal budgeting and document storage tool.