Did you know that Sole Proprietors and Partnerships are among the oldest forms of business on earth? The draw of this form has attracted people since the first smith hung his sign outside his shop in medieval England or the first African started breeding cattle on the savanna. The reason for this is its simplicity to set up and run. In short, the Sole Proprietor or Sole Trader or Partner IS the business and the business IS them. You cannot separate the two. They are the multiple personalities of the business world. This form of business has various pros and cons, which a short Google search would unearth for you, so we won’t rehash these. We will focus solely on the tax implications and how we can help you navigate these pitfalls.
How do I set up a Sole Proprietor?
You’ve had that idea in your head for a while? Got the coolest business name picked out? Well, walk outside your house and proclaim to the world that you now own a business. Or, you know, put it on twitter if outside isn’t your thing.
Yes, it is that easy, you don’t have to register anything with anyone, no fees, no shelf companies. You have an idea and you implement it. You become “your name” trading as “coolest business name ever” as soon as you start doing something about it.
If a partnership is your thing then the only requirement is a partnership agreement. And remember: “good contracts make good partners”, so make sure it covers everything that might happen between you.
What can an unregistered business do?
Everything! Well, almost everything. You can have employees, you can issue invoices, you can rent premises, you can have a separate bank account (and should have one), you can register for VAT (and will have to when you hit the compulsory limit) and you can in some instances even enter into financial agreements.
It’s all the fun of a CC or PTY (LTD) with less of the compliance burden.
What are the legal requirements?
Your business may not be officially regulated by CIPC or similar body but you are governed by a few requirements from a tax point of view. Firstly, you are expected to keep good records. Use a proper accounting system, not (the cardinal sin) Excel. Your books must be kept just as well as any registered business would. If the nitty gritty money side of things is not your thing then consider outsourcing the bookkeeping to someone who knows what they are doing: Allen Payroll, Accounting & Tax. Having correct books is crucial to getting the most benefit when it comes tax time.
Along with good records and issuing invoices you will also instantly become a provisional tax payer (YAY!). This means you have to submit two provisional tax returns in addition to your normal final return. Take a look at our blog post: “Provisional Tax – Demystified” for a quick overview of this system. This is where things start to get tricky.
So, how exactly are Sole Props/partners taxed?
Basically, as a business, but also as individuals. Same same, but different as they say. The method used is to do a tax calculation of your business profit which results in a taxable profit or loss and then add that trade income to your personal tax return, done in July – October, where you will then pay the taxes on it based on the usual personal tax tables. Partnerships work on the exact same principle except the profit or loss is split between the partners.
What kind of personal things can I use as a tax reducing expense?
Anything that is used for making an income. Your vehicle, your home office, the coffee drunk in that office, the stationary, the electricity, the repairs to the house, your cell phone etc etc. There are so many items that can be used that it can become a little overwhelming. Also keep in mind that there are special rules for how these expenses must be apportioned and used (before you come back to me saying the advice you used was bad because SARS disallowed something).
Why do you need a qualified accountant and tax practitioner to do this calculation?
Because it is difficult. I mean bathing a cat difficult, and with similar scars if you get it wrong. The ins and outs of looking at a trade as its own business but also bringing in the maximum personal expenses available to reduce the tax payable is an intricate process. The completion of the tax return itself is also fraught with dangers and audit chances are high in our experience, so you want to get it right the first time.
For being the simplest form of business, it does get a bit complicated when tax time comes around.
How will Allen Payroll, Accounting & Tax make my life easier?
And this is where we come in. Our qualified tax practitioners always stay in step with advancing legislation and we work with a lot of Sole Proprietors, giving us plenty experience in this space. We know what to ask and when to ask it, which takes the pressure off you and your business.
Do you know how to proportionately claim home office expenses and how to successfully defend these expenses to SARS? We do. Do you know how to get the most out of your working vehicle and prove the deduction to SARS? We do. Will you get more sleep knowing that the professionals are on the job? We think you will.
So, sign up for one of our monthly unregistered business compliance packages without delay.
Author: Brandon Allen
I'm a business Accountant in practice. Nothing fancy about me, but occasionally I have a flash of inspiration you might find useful. My blood is also 50% coffee.
Note that no information in these posts constitutes official advise, please contact us with your specific needs.