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Business Set Up - The Sole Proprietor

The golden oldie of business set-ups.

In this post, we take you through the most important elements of setting up as a sole proprietor in South Africa.

Who is a sole Proprietor?

According to SARS, a sole trader (more commonly referred to as a “sole proprietorship”) is a business that’s owned and operated by one individual. It’s also the simplest form of business entity.

As a sole proprietor, you and your business are regarded as one and the same. It means you don’t need to register it as a separate company with the Companies and Intellectual Property Commission (CIPC).

Sole Traders and SARS

In the eyes of SARS, the individual and the business are one and the same person, so your tax return is filed in your personal capacity and the taxable income generated by the business is included in your personal tax return which is filed annually via an ITR12 (which is a tax return for individuals). In addition to filing an ITR12, small business owners need to be registered as provisional taxpayers since they earn income other than by way of a salary.

In summary, as a sole proprietor, one needs to file an ITR12 annually and 2 IRP6’s (provisional tax).

If you already have a tax number, you can use this and declare your income in your personal tax return.

Pros and Cons

It all comes down to two factors – legal and financial liability.

As previously mentioned, a sole proprietorship is a simple format to set up and manage, as it doesn't have to be legally registered and is easy to discontinue however there are always two sides of the coin.

The disadvantages of trading as a sole trader are that all of the responsibility and risks fall to you as well. If the business fails, your assets could be seized to pay any debts that are owing. Sole proprietors are also limited in the amount of capital they can raise.

Key financial management points for Sole Traders:

Because there’s no division between you and your business entity, the income you make from your business as a sole proprietor needs to be filed as part of your personal income tax.

Monies spent on goods or services that are actually necessary in order for the business to generate money, are tax deductible. Often however, there are some mixed use expenses such as a business owner who uses his car, telephone or internet for both personal and business purposes. Only the part of the expense related to the business is tax deductible and therefore one must be able to apportion the expense. Record management is key here.

The first prize is to have a separate business bank account, and all business-related expenses should be paid for using this account. This makes it much simpler to track your business-related expenses. Keeping a proper record of your expenses as well as the invoices/slips that back them up is vitally important. This should be done regularly, to reduce the administrative burden when tax season arrives as well as ensuring the accuracy of the records kept.

Need assistance with your sole proprietorship? Book a free consultation.

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