Legal Requirements for Starting a Business in South Africa

In the excitement of starting a new business, business owners often put all their focus and energy on revenue generation and ensuring profitability for their company, and overlook the legal and compliance aspects.

There is, however, a long list of laws and taxes that all businesses need to adhere to. This includes legal issues that owners deal with in the day-to-day running of their business, such as reviewing contracts to protect their business, handling supplier or contractor disputes, Internet security breaches, product liability issues, employee theft, tax audits, employee confidentiality concerns, and threats of customer lawsuits.

Legal Challenges

Business owners must follow many laws and rules, which can be a lot of work for new businesses. This hampers the growth of small businesses in the country. The Small Business Project reveals that, on average, small businesses spend 4-6% of their turnover on meeting regulatory requirements.

Despite the challenges they face, business owners must meet all their legal requirements. The consequences of non-compliance with applicable laws include criminal charges, hefty fines, loss of opportunities and reputational damage, according to LexisNexis.

Below is an in-depth guide to help business owners to meet all relevant legal and regulatory responsibilities.

The ownership structure you choose for your business is important as it determines the legal requirements for your businesses.

There are 5 current legal entities that entrepreneurs can choose from, including:

• Sole proprietorship
• Partnership
• Private company
• Business trust
• Personal liability company (for members of professions such as attorneys, medical practitioners, accountants or quantity surveyors)
• Combinations of legal entities

Each of the various types of businesses has “varying degrees of responsibilities such as reporting, compliance, tax positions or exposure to liability in personal capacity”

Access the full guide: Entrepreneurs! Your Annual Legal Guide is Here

Compliance refers to the process of making sure that enterprises operate in conformity with the established laws, regulations, and legislation of that country. In South Africa all businesses are governed by the Companies Act, No 71 of 2008, and registered by the Companies and Intellectual Properties Commission (CIPC).

Running a compliant business not only keeps businesses out of trouble with the law and the tax man, but  it also opens up to many opportunities. For example, shareholders, potential investors and funders will require that you have a compliant business if they are to consider your business for any funding or investment opportunities. This is also true if you plan to apply for any government tenders or supplier enterprise development programme.

The most common compliance requirements for new businesses include registration with the CIPC; and registration with the South African Revenue Service (SARS) for income tax, VAT, UIF, COID, and PAYE. Your business also needs to be registered with the Department of Labour which is responsible for matters relating to employment, unemployment insurance and occupational health and safety.

Additional regulations and legislations that businesses need to adhere to are industry registration (depending on the industry that you operate in) and licensing and permits. There are also specific certifications that your business needs to operate depending on your industry or sector, the services or products you sell, your location and the type of business you are operating.

Find: The Top Company Registration Service Providers In South Africa

To obey the law, your business needs all the necessary licenses, permits, and registrations before trading in South Africa.

Some businesses in South Africa must have a licence before they can start operating. This includes businesses that sell or make perishable food, health service providers, and places that offer entertainment activities.

Food service businesses have additional rules to follow. These rules include obtaining permits for health and safety, selling alcohol and tobacco, and operating in specific areas.

Business owners need to determine what licenses and permissions they need, then apply to the government for registration

Access the full guide: Business Licences in South Africa 

The three types of taxes that small businesses pay are turnover tax, employee taxes (PAYE, UIF and SDL) and VAT (value-added tax).

To ensure that taxes claimed and paid by your firm are correct, all businesses must maintain accurate financial records throughout each year of assessment such as bank statements, sales invoices, credit notes, suppliers invoices and payroll records.

Accurate record keeping not only improves your accuracy when submitting your tax returns but it can also help with forecasting should you need to issue a payment to SARS.

It’s important to note that records should not only be kept during the tax year for filing purposes but you are also required to keep these records.

Turnover Tax

SARS introduced turnover tax, which is a simplified tax system, to make it easier for micro businesses to meet their tax obligations. Only small businesses with a turnover of less than R 1 million per annum can qualify for turnover tax. This system applies to:

• Sole proprietors
• Partnerships
• Close corporations
• Companies
• Co-operatives

This tax system works off the taxable turnover of a business. According to SARS, the turnover tax rate for micro-businesses is:

Turnover (R) Rate Of Tax (R)
0 – 335 000 0%
335 001 – 500 000 1% of each R1 above 335 000
500 001 – 750 000 1650 + 2% of the amount above 500 000
750 001 and above 6650 + 3% of the amount above 750 000

Companies that register with SARS stand to benefit in several ways, including being eligible for tax deductions.

Elize Giese, head of investments for FNB Business shares the following ideas that can help business owners to save on taxes.

• Know which exemptions the business qualifies for.
• Track all business expenses.
• Bring a qualified accountant or tax professional on board to avoid costly financial and tax mistakes.
• Use credible online financial tools.
• Capitalise from running a small business from home x tax deductions such as interest payment on the bond and daily expenses incurred from running the business.
• Understand the tax rate for temporary employees on different salary brackets to avoid mistakes and fines from SARS.
• File your returns on time.

Read the full article: Your Guide to Small Business Tax 

Business owners must educate themselves on tax compliance, including tax rates, rules, filing deadlines and penalties in their industries.

VAT

Businesses making over R1 million in a year must register for VAT.

If your small business must or wants to register for VAT, you must send VAT returns and payments every four months. These returns are due on the last days of June, October, and February.

Registered small businesses must charge VAT on all goods and services sold to 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.

Registering for VAT lets businesses claim input tax on all goods or services they provide, giving them an advantage.

To register for small business VAT, you will need to supply the following documents:

• Copy of your business’s certificate of incorporation
• Copy of your trust deed and authority letter
• Copy of your original ID
• 3 months bank statements
• A letter from your banker, or an original stamped statement from the bank
• Your latest month’s invoices to be used as proof of trading
• Proof of your business address (Municipal account or rental agreement)

Access the full VAT guide: Small Business VAT Registration 

A part of running a small business is ensuring that you comply with relevant employment laws and tax.

Below are the labour legislation and tax requirements that businesses must comply with:

• Registration for employee tax with SARS (UIF Registration, PAYE Registration, Skills Development Levy (SDL) Registration, Workers Compensation (WCOMP).
• Registration with the Department of Labour and adherence with labour legislation.
• Processing of payroll in line with current legislation.
• Administration of medical aid, and pension fund figures.

Other payroll administrative tasks include managing monthly employee tax submissions (PAYE, UIF, tax certifications) and other annual reconciliations, as well as statutory deductions and generation of compliance reports.

To help business owners, an automated solution can calculate the complex formulas for the various statutory deductions and generate compliance reports.

Find: Top Payroll and HR Software In South Africa

Contracts are important in a business as they outline expectations for contracting parties and “provide a degree of protection should things not go according to plan”, explains attorney and CEO of Britain Renecke, Cézanne Britain in the article ‘Legal Advice for Handling Contracts’.

Renecke continues, “A contract sets the ground rules for entrepreneurs doing business with others – and vice versa. A contract is clear in specifying the terms of engagement between the parties involved when it comes to what’s expected (the responsibilities and duties for each party), and it also sets out the consequences that may occur should your dealings (or relationship) go awry.”

Find: The Top Commercial Law Services Providers In South Africa 

Entrepreneurs frequently sign different contracts for their small businesses. These contracts include agreements for shareholders, employees, business premises, insurance, and financial and service contracts.

Contracts can protect a business’s private information. These contracts include non-disclosure or confidentiality agreements. Additionally, contracts may also have standard terms and conditions with suppliers or service providers.

Business owners should always have written agreements with third parties. These agreements should cover any services or products that they give or receive. Additionally, the agreements should also cover any services or products that they deliver or provide.

Businesses can protect their intellectual property by registering their patents, copyrights and trademarks with the Companies and Intellectual Property Commission.

Three ways business owners can protect their intellectual property – copyright, patent or trademark.

• Copyright protection gives the owner of the original work exclusive right to copy and distribute a creative work;
• Patents protect inventions;
• Trade marks protect marks (e.g. names, logos, slogans, etc) that are used to identify and distinguish the products or services of a business.

Patents and trade have to be registered with CIPC to take effect. Copyright is secured automatically when the original work is created.

All South African businesses must follow the PoPIA, which is a law that protects personal information. From 1 July 2021, all organizations must safeguard customer data and privacy under the new law.

The Act requires that “personal information is kept safely by organisations who collect it, not sold to third parties, not lost and not used or held for longer than was originally necessary.”

Business owners who fail to comply with the act face potential business-crippling fines.

Businesses must comply with the Consumer Protection Act as a supplier and receive protection as consumers. The Act aims to establish a fair and accessible marketplace for consumers. It does this by setting national norms and standards for products and services.

The Act covers consumer protection and business practices for products and services. It includes aspects such as quality, fair pricing, returns and refunds, and complaints process and solutions.