Before you get your business off the ground, it is critically important to choose a legal structure that best fits your company’s needs. The legal structure you pick for your business has an impact on your ability to raise money, the amount of taxes you pay, the paperwork you are required to do, as well as the personal liability you face. Most small business owners in South Africa choose from the four major types of business structures: sole proprietorship, partnership, cooperative, and corporation.
There are a range of advantages and disadvantages of a sole proprietorship, as well as each type, and they need to be weighed up carefully when making the choice. That said, when starting out you are likely to choose a sole proprietorship, since it’s relatively simple to set up compared to other legal structures. Also known as a sole trader, a sole proprietorship is the least complex business form for one person who owns and runs the company.
Advantages of a Sole Proprietorship
There are a range of advantages of a sole trader which centre around ease of set up, less compliance requirement, and overall cost effectiveness and a structure from which you can easily grow and choose to change as your business grows.
It’s simple and affordable
No matter the type of business you would like to start, be it an online e-commerce store, freelance writing business, or anything else you’d like to try, a sole proprietorship is flexible and easy to start. It requires less paperwork than other corporate forms and is generally much more affordable in terms of set up costs. You only need to fill out a simple government form to register a fictitious business name, for example.
Operating freedom and flexibility
As long as your business remains small, a sole proprietorship is the most flexible business form to change. You can make any change you want, including changing business policies and type of business – without much in the way of either cost or process. Sole proprietorships also offer a higher degree of control and fast decision making opportunities. This is very different to partnerships or corporations, where you need the consent or approval from partners or officers to make any business decision.
Tax advantages of a sole proprietorship in South Africa
The tax advantages of sole proprietorship are a benefit. As individuals are taxed on a sliding scale in South Africa, it means the taxation rate increases as income increases.
As an individual, a general tax rebate is applied and it brings it down to a flat range depending on your age. This is compared to a company, where irrespective of the value, profits are taxed at 28% and there is a 20% dividends tax that is levied on profits for future dividend use.
Disadvantages of Sole Proprietorship
While it’s quick and easy to set up there are a range of disadvantages that can have long lasting consequences on the business owner. The most common disadvantages of a sole proprietorship include unlimited liability, difficulty in raising capital and more.
In a sole proprietorship, your small business is personally liable for business actions and debts. A sole proprietorship doesn’t exist as an entirely separate entity, and it means that all personal wealth and assets are linked to the business. This means if your business goes under you will need to pay debts.
Difficulty raising capital
As businesses grow, finding potential investors and raising capital is usually a consideration that many business owners take into account. It is much more difficult for a sole proprietorship as investors have less peace of mind. This is mainly due to the liability and use and security of their investment when it comes to a business with no separate legal entity.
Difficulty tracking expenses and lack of financial control
A sole proprietorship’s structure can result in less urgency when it comes to tracking business expenses as well as preparing financial statements. Due to the nature of running the business, and it usually consisting of fewer employees, you may not have enough time to track and separate business and personal expenses.
Accounting Software for Sole Proprietors
If you are a sole proprietor, QuickBooks can help you stay organised. You can track and manage your business expenses.
Tools like easy expense tracking, as well as automatic receipt organisation, invoicing processes, cash flow summaries and much more help you stay on top of things. Get the free trial today.