Starting a company in South Africa requires entrepreneurs to navigate many legal and regulatory requirements. One crucial early decision for business owners is determining the ownership structure of their business. This choice will have an impact on the legal requirements for your businesses, including reporting, compliance and tax requirements; as well as your exposure to personal liability. Moreover, the business structure should align with your growth and exit strategy, as well as the nature and complexity of your business.
Among the various structural types available a private company stands as one of the most common and popular choices. Other options include sole proprietorships and partnerships to public companies, business trusts and personal liability companies.
Establishing and operating a private company comes with specific responsibilities. This guide explores the key considerations, processes, and obligations that small business owners need to be aware of.
A private company is a type of business structure available to business owners in South Africa, previously known as close corporations. It’s easy to identify a private company by its name, as it typically ends with the words ‘(Proprietary) Limited’ or ‘(Pty) Ltd’.
What makes a private company distinct is that it’s regarded as a separate legal entity from its shareholders and directors, “with rights and duties of its own” and as such, is required to register as a taxpayer.
A company possesses key characteristics that define its structure and operations, including:
There are a number of advantages to establishing a private company. The most significant benefit of this ownership type is that it limits company directors’ personal liability for company debts. “This means that the shareholders’ assets are protected if the company goes into liquidation” and are offered protection from creditors ().
Other key advantages of the private company structure are as follows:
While private companies hold many benefits, there are disadvantages. This kind of ownership structure is subject to many legal requirements which makes it more difficult and expensive to establish and operate than other forms of ownership such as a sole proprietorship or partnership.
Additional disadvantages, as outlined by Grove Accounting, are as follows:
Private companies’ legal obligations include registration with the Companies and Intellectual Property Commission (CIPC), name reservation, drafting of the company’s memorandum of incorporation (MOI), and submitting the necessary documents to the CIPC. It is the responsibility of the owners of private companies to manage all key legal documents and registrations required.
Registering your private company
Private companies in South Africa are required to register with the CIPC. Businesses can register online via the CIPC website, or on the Bizportal.gov.za website, a platform created by the CIPC that offers company registration and related services. There is also the option to register your company via your bank of choice. The process is however only complete once all signed supporting documents are received by the CIPC.
The documents needed complete the registration are:
Once your business is registered as a legal entity you can open a business bank account and register with SARS for tax purposes.
There are a number of tax obligations and requirements for private companies, including corporate income tax, VAT, PAYE (Pay-As-You-Earn), and employee tax. It’s therefore important that businesses ensure they adhere to proper financial record-keeping, annual financial statements, and auditing requirements.
Below are taxes that are relevant for a private company.
1. Corporate Tax
Private companies are required to pay Corporate Income Tax on its profits twice a year. Taxable profit is defined as gross income generated minus related tax deductible expenses. According to SARS, in addition to annual tax returns, every company is required to submit provisional tax returns (IRP6). The first of these returns is required to be submitted six months from the start of the year, and the second at year end, and must both contain an estimate of the total taxable income earned or to be earned for the full year.
2. PAYE, UIF & SDL
Private companies are required to register for employee tax with SARS. This includes Unemployment Insurance Fund (UIF), Pay-as-you-earn (PAYE) and Skills Development Levy (SDL). UIF gives short-term relief to workers when they become unemployed or are unable to work because of maternity, adoption and parental leave, or illness. It also provides relief to the dependents of a deceased contributor. The SDL is a levy imposed to encourage learning and development in South Africa and is determined by an employer’s salary bill. The funds are to be used to develop and improve skills of employees. PAYE stands for Pay-As-You-Earn and the process involves withholding tax on taxable incomes of employees.
Businesses with a turnover exceeding R1 million in any consecutive twelve month period must register for VAT. Businesses with a turnover exceeding R50,000, in the past twelve month period, may choose to register voluntarily. If your small business is required to or has chosen to, register for VAT, you will need to submit VAT returns and payments every four months. These returns are due on the last days of June, October, and February.
When your small business is registered as a VAT vendor, you will need to charge VAT on all of the goods and services you sell to your customers. Although, certain goods are zero-rated, or exempt from VAT. The VAT charge, or output tax, is 15% of your goods and services sale price.
4. Dividends Tax
Companies that declare and pay a dividend need to register for Dividends Withholding Tax so that they can file a Dividend Return and pay this tax to SARS. This can be done on SARS eFiling. The SA Tax Guide states that dividends tax is a withholding tax that is deducted from dividend payments and paid over to SARS by the company paying the dividend, rather than by the beneficial owner (the recipient).
5. Customs Duty
According to Tax Tim, any company that imports goods to South Africa, or exports goods from South Africa, is required to be registered with SARS for Customs Duty.