Why do people register their businesses?
Were they advised to do so by a government agency? Do they believe that they have to be registered to get funding, to qualify for tenders or to get contracts?
Consider this: the vast majority of businesses in South Africa are not registered. They are informal and have been operating successfully, and legally, for years.
So, what are the implications of having a registered business?
Monique Sharland of Business Accounting Network (BAN) says that, because registered companies are required to comply with the Companies Act,
they “cost more to set-up and run than the simple business structure of a sole proprietorship or partnership …”
On top of that, if you are the owner and director of a registered company, you need to understand the legal language of the Companies Act because you personally will have to comply with a lot that the Act requires.
The Act “prescribes the minimum requirements” for your accounting records and makes it “an offence” not to produce them in the “prescribed manner and form.” Your Annual Financial Statements (AFS) “must comply with the published Financial Reporting Standards” which in your case will probably be the IFRS for SMEs. If you don’t know what all that means, you will have to get a bookkeeper or accountant to do your business ‘books’ for you.
Sharland points out that
accountants “are subject to quality control in terms of the international professional standards of quality control governing accountants, adding to the cost of preparing annual financial statements for companies.”
Professional accountant, Lindi Jonker explains that the Companies and Intellectual Property Commission (CIPC) is monitoring companies’ compliance with the Companies Act. It is now mandatory for all registered companies, large and small, to answer the 24 question Compliance Checklist and file (ie submit) this to the CIPC before filing its annual return.
The Checklist asks whether or not the company has been compliant with the sections of the Companies Act, including:
- Solvency and Liquidation tests (is the business commercially solvent based on fair value?)
- Shareholders Agreement and Memorandum of Incorporation (MoI)
- Accounting records, Financial statements and Annual Financial Statements (AFS)
- Securities (shares in the company) register and Shareholder meetings
- The board, the directors (incl company owners) and prescribed officers
and several others.
Even if you employ a company secretary to do your company’s compliance paperwork, if the CIPC’s Compliance Checklist is not completed or it is not answered honestly, you as the owner-director could go to jail.
Sharland also reminds us that because a registered business is a separate persona (ie legal entity) from its owner, both it and its owner must be registered with SARS. The company must prepare and submit its own provisional and annual tax returns and pay its own Corporation tax to SARS. Many companies have to pay a bookkeeper or accountant to do this for them.
In addition, as the owner-director of a registered company is automatically an employee, someone – perhaps a bookkeeper – must calculate, deduct and pay that person’s PAYE to SARS. If the owner doesn’t take a salary but draws money as needed, SARS might levy a dividend tax on that money.
What are the advantages of having a registered business?
When someone sues a registered company, because the company and the owner are separate legal personas, the owner’s personal assets are protected under ‘certain circumstances’.
Although companies must pay the fixed Corporation tax of 28% on their profit, however little profit they may make, they might qualify to be registered to pay Turnover Tax or Small Business Corporation Tax (SBC). That could amount to a significant saving.
And are there advantages to NOT having a registered business?
If your business is not registered, you as the sole proprietor or a partner are only required to keep accounting records in the “prescribed manner and form” to comply with the Income Tax Act and the VAT act.
As a sole proprietor or a partner, you must still pay tax, but you do so on the profits of your unregistered business together with all your own income, at personal tax rates. When your growing company’s profit causes your tax to approach the company tax rate (currently 28%) then it is time to consider registering your business.
When it comes to tax, CIPC reminds you that “Even though you may not be registered with the CIPC, you will still have to be registered with the South African Revenue Services and will still be liable for tax if your turnover exceeds the prescribed threshold.”
I am not qualified to give advice regarding registering or not registering your business. Before you make the decision to register or not to register your business, you should get professional advice.
Mentor, trainer and business advisor at DoBetter.Business
Click here if you want to discuss not registering your small business