The benefits of being a sole proprietor when starting a business

Once you’re ready to start your own business or side hustle, one of the first things to consider before you start trading is the type of business ownership to use. 

There are several options to consider, each with its own tax and legal considerations — the two most common being sole proprietorships and private companies. For a business owner who wants to keep things simple, and overheads under control, becoming a sole proprietor is the more viable option. 

A sole proprietorship is not a legal entity, and you don’t need to register your business with the Companies and Intellectual Property Commission (CIPC), while with a private company you do. Any individual who sets up and owns their business outright is considered a sole proprietor. This means no other parties can buy in (acquire shares) to your business. You are personally liable for any tax payable to the SA Revenue Service (Sars) and you carry the full business risk in your own name, but on the other hand the revenue and profits are all yours.  

Because you don’t have to register as a sole proprietor, you become one as soon as you open your doors, whether you’re running a coffee truck, working as a freelancer, or even offering a dog-walking service.  

Banking as a sole proprietor 

As a sole proprietor, you need to consider the type of bank account your revenue is paid into. A lot of sole proprietors use their personal account as their business account, but this can lead to problems.  

Having a business account helps you keep your business’s revenue and your personal income separate, though as a sole proprietor it is not essential. Should you opt for a separate business account, consider opening a TymeBank EveryDay Business account. It’s something you can do in under five minutes, with no paperwork and no monthly fees.  

Don’t forget those taxes  

When it comes to taxes, as a sole proprietor there are several things you need to know. If you have employees, for instance, you are required to pay their PAYE (pay as you earn) monthly and the same goes for UIF. You are also liable for VAT if you surpass the R1m revenue ceiling over the course of a year. Remember that besides adding 15% to all your invoices, you also need to submit a VAT return to Sars every two months, depending on the nature of your business.  

Regarding your personal tax, while you do not have to pay PAYE yourself unless you are still earning a salary, you do need to file a tax return for your combined personal and business revenue per year through an ITR12 (which is a tax return for individuals). You also need to be registered for provisional tax as you are generating income that is not a salary. This means you need to complete and file an IRP6 form. Even if you are employed and have a side-hustle, you still need to register for provisional tax.   

Since taxes are unavoidable, it’s important to be disciplined about providing for them. A good idea is to set aside 30% of your income in a separate savings product, such as TymeBank’s GoalSave, and keep it there until your provisional tax (an advance payment of your tax liability) is due. Not only have you ring-fenced the money, meaning you won’t be tempted to use it, you will also earn interest. GoalSave, which is linked to your EveryDay Business account, offers up to 11% interest a year.

It is also wise to keep proper records of all your business expenses and income, including invoices, so that you are able to distinguish between personal and business expenses at all times. Note: Sars may decide to audit you. This is based on a random selection and, if chosen, you will be required to declare all your income and expenses.  

Opting for a sole proprietorship to begin with is the easiest and most cost-effective way to get your business off the ground. Embarking on a new business venture is both exciting and nerve-racking but with the right tools and knowledge you’ll be well on your way.  

This article is sponsored by TymeBank.