How can I structure ownership in such a way that I don’t...

How can I structure ownership in such a way that I don’t lose my tax breaks whilst protecting my current restaurant?

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I currently own  a small restaurant business as company in my personal capacity which classifies for small business tax breaks.. I also have another food truck business currently as a informal 50/50% business partnership. I want to formalise the food truck business into a company and expand into further restaurants but will lose my small business tax break if I am listed as a director of another company.   How can I structure ownership in such a way that I don’t lose my tax breaks whilst protecting my current restaurant… trust?

The nature of the Small Business Corporation tax reduction is simply that – for small businesses.  It is not intended for taxpayers that have multiple businesses and companies – that is why your reader will lose the benefit once he owns shares in another company.  He may be appointed as a director – this will not have the negative effect, but he may not own shares (or membership) in another company.

He may indeed register a company and let his trust own the shareholding, and still qualify for the SBC tax break in his restaurant business, but the newly formed company will not qualify, since the shareholder is not a natural person (trusts are not regarded as a natural person).  He should also speak to his broker or estate planner when he decides to put a business in a trust, since this will have an effect on his estate and taxes upon death.

He must also remember that a partnership is also a formal business structure.  Simply because it is not a company, does not mean it is not formal.  As long as he draws up adequate contracts between him and his partner, there should be no problem, and he still keeps his SBC tax break in his restaurant, and his business should still be protected.

The only downfall with partnerships is that it dissolves when the partners go their separate ways, unlike a company that can continue if a shareholder or director resigns or sells his shares.

Alternatively he my appoint his wife/partner/child as shareholder of the new company – then the tax break will remain in tact, both for his current restaurant business as well as his newly formed company, but then, of course, his is technically not the owner any longer.

He also has to make sure that the tax benefit he gains from complicated structuring of companies and trusts outweighs the additional accounting and consulting costs and red tape from doing it this way.

 

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My gut feel is usually that keeping it simple is a better route to take, and as a result losing the Small Business tax break, as this is intended for Small Business only.

Related: When should I insure a business against risk?

Le Roux van der Walt
Le Roux van der Walt is an accountant who swopped the overstressed, underpaid life of working at a firm of Chartered Accountants in the Cape Town city centre, where clients are simply another file on his desk, for the more fulfilling life of working for himself and servicing smaller clients in person. Lighthouse Consulting gets its name from the view from Le Roux’s office where he started off in Mouille Point, and signifies the guiding light Lighthouse Consulting aims to be for their clients. Email leroux@lighthouseconsulting.co.za for more information.
  • Bobinatorz

    Le Roux, a question, if you don’t mind.
    I have a similar situation. Imagine the same scenario as above, but I want to expand into neighbouring SADC countries.
    Would my shareholding in a foreign company disqualify me from SBC rates here in SA?
    Do foreign companies fall under the definition of a ‘company’ from Section 1 of the Income Tax Act?