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Ready to Start a Business in South Africa? Here are 8 Legal Requirements for Businesses in South Africa

If you are looking to start a business in South Africa, there are several legal requirements to think about, such as your tax obligations, accounting regulations and employment laws. Also before you #StartNow, you will need to take care of various registrations.

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Start a Business in South Africa
If you are looking to start a business in South Africa, there are several legal requirements to think about. As an entrepreneur about to start your new business, you need to know your legal obligations and build compliance into your business model. There are various compliance matters to be aware of, such as your tax obligations, accounting regulations and employment laws to be aware of. It is also very wise to think about ways to mitigate your liability by taking steps related to strong accounting and controls, having a business insurance policy and getting ahead of any potential audit requirements. #StartNow! We have drawn up this handy guide with 8 key insights to follow for entrepreneurs and South African startups. This guide will help answer questions you may not even have known you needed to answer, and help you plan your business journey and maximize your growth potential! In these business insight piece, we will cover the legal and compliance requirements to think about when starting your profitable business in South Africa

Compliance Requirements When Starting a Business in South Africa

Having a fantastic business idea is all well and good, but before that idea can become a reality and actually become an operational business, you will consider and comply with various regulations. Let’s dig in!

Selecting the Right Entity Type for Your Business

There are basically three entity type options to register your startup.  As an entrepreneur, you need to select the right one for your business idea. It’s important to understand the difference between each type of business entity, and to know that each has its own advantages and disadvantages.

Entity Type 1: A sole trader 

This is easily the simplest entity structure to launch and in South Africa, many small businesses are sole traders. Just as the name implies, a sole trader is a one-man operation. This entity type works great if  you’re the single person operating your business, which will trade under your personal name (e.g. Mxolisi Khoza). Because you are in effect the business itself when operating as a sole trader, there are some financial and other risks involved. Under this business structure, there is no separation between your business and yourself! 

As a sole trader, you have the freedom to run the business as you please. It’s relatively easier to start a business as a sole trader, and one benefit is that you as the only member of the business will get all the profits. Further, a sole trader can easily dissolve a business without much red tape and paperwork.

Sounds great, right? But beware!  Before you start your business as a sole trader, the risks mentioned above are well worth thinking about very seriously. 

Here are the risks of operating as a sole trader:

  • As a sole trader and sole owner, you will have unlimited liability. What does “unlimited liability” actually mean? Well, as the only owner of your business, you will be legally liable (on the hook) for all the debts of the business. That means that creditors and funders will have the ability to put a claim on your personal property and assets, should you fail to honour your obligations. Since there is no separation between your person (you) and your business, every contract you sign as a sole trader is signed under your own name. So, this risk should give any entrepreneur looking at starting a business as a sole trader some pause. 
 
  • As a sole trader, your ability to get funding for you business (raise capital) is diminished. Most businesses can’t get off the ground without some capital. More often than not, you will need to seek funding from lenders, lenders being either banks or other financial institutions (Read our brief article on Raising Capital). When you are operating your business as a sole trader, your ability to get business comes down to your personal ability to secure this funding. That, your personal credit worthiness will come into play. This can be quite a challenge for many entrepreneurs, either due to insufficient income to support a large monthly payment, or other issues such as poor credit history.Many sole traders fail due to lack of operating capital, and when your business goes through a rough patch, it means you are personally affected. This is yet another reason to rethink this entity type.
 
  • As a sole trader, your personal skills and capabilities represent your company’s earning potential As mentioned earlier, a sole trader is the only employee allowed under this business entity type. That means you will need to be the dish washer, head chef and also your own receptionist. You will need to wear as many hats as needed to run your business! This can be a challenge, but it’s also possible to retain companies like Kettle Consulting to handle your bookkeeping and compliance matters. The main disadvantage here is that your business will be limited only to those activities you’re personally good at and licensed (if needed) to perform.
 

Entity Type 2: A partnership

If you have a good friend, family member or colleague that you want to work with, you can operate under the partnership entity type. In fact, you’re allowed to have many partners under a partnership and the requirement is that each partner must contribute to the business. Having a partnership agreement in place is a great way to govern the way the business runs, and it’s worth hiring a lawyer or a professional firm like Kettle Consulting to help you structure this document.

Since the partnership is not registered as a standalone business for tax purposes, the tax liability will be split across each partner and each partner is taxed on their share of the profits in their personal capacity. This is essentially like a sole trader, except that the liability is shared equally among the partners.

Entity Type 3 – a private limited company

Often just known as a PTY, this a private limited company entity type separates the liability between the business owners and the business itself. Again, this entity type depends on the kind of business you plan to conduct, and it may be a good fit. The main differentiator here is that the business protects you as an owner from being personally liable and losing your personal assets in the event the business runs into financial trouble in the future. You can think of this as a truer opposite of the sole trader entity.

Getting Your Company Registered

Once you have settled on the right entity type for your business, it’ll be time to get the business registered! This is certainly an exciting moment for any entrepreneur, because it’s an early step toward making your business a reality. When selecting your business name you want to choose a name that best represents your brand and vision. Of course, you’ll need to perform a name search to ensure that the business name is not already registered and in use by another company.

As a business just starting up in South Africa, you have access to various channels through which you can register your company. The first is to register online via the Companies and Intellectual Property Commission (known as the CIPC) portal. The second is to use the CIPCs newer BizPortal, which has a bit more functionality than the legacy CIPC system. Also, your local bank may have the ability to help you register your business – ask about this when you visit your bank and speak to a business banker.

Lastly, companies like Kettle Consulting offer company registration services, among other key offerings. We can help you get your business started, from planning to registration, tax and other compliance, as well as management consulting and capital raise.

Compliance: Statutory Registrations for Businesses in South Africa

Now on to the various statutory requirements your business will need to comply with! The following are the two major arms of government you will interact with as a new business.

The Companies and Intellectual Property Commission (CIPC)

The CIPC is a governmental agency that is part of the Department of Trade and Industry of South Africa. The CIPC exists to provide businesses an efficient platform through which they can lodge various registrations related to business and intellectual property rights. Through the CIPC, companies can handle their proprietary designs, patent their inventions, copyright and do trademarks.

The South African Revenue Service (SARS)

Whether your business is large or small, you are required to register with the South African Revenue Service (SARS). SARS is South Africa’s tax authority, and staying on top of your taxes is critical to the launch, operation and growth of your business. Registering with SARS will make your business compliant in terms of various tax requirements. When you register your business as a private limited company through the CIPC, your company will be registered automatically with SARS. A tax registration letter will be emailed to you directly from SARS following your CIPC registration, which contains your income tax reference number. Your tax reference number is your unique tax identification number with SARS, which is attached to your tax paper profile with the authority. Further, if your turnover will be more than R1 million per year, then you will be required to register for Value Added Tax (VAT). This registration can also be done online via the SARS portal; you will need to submit form VAT101 for VAT registration.

All this can seem overwhelming, but you have support! At Kettle Consulting, we work with you to handle all of your tax registrations and other compliance matters. 

Stay on top of your tax and legal obligations

Starting and running a company comes with a significant level of responsibility. This is particularly applicable when you hire employees to work for your company. As an employer, you are required to register for Pay As You Earn (PAYE). This is applicable if any of your employees make more than R40 000 annually. And if your total payroll will be more than R500,000 over the coming 12-month period, you will need to register for the Skills Development Levy (SDL). The funds paid under the SDL are to be used to develop and improve skills of employees. The good news is all of these registrations can be done for you by a qualified firm like Kettle Consulting.

As a business owner, you will need to equip yourself with the knowledge that matters, and taxes are a key component of running a business. The SARS online portal is a great resource for some light reading on your tax obligations, or you can contact us and one of our tax advisors will walk you through your specific tax requirements. Staying on top of your taxes is critical so that your business does not suffer penalties in the future. With your taxes handled, you can focus on the important work of building, running and growing your business

Shielding Your Company with Business Insurance

Unfortunately, many entrepreneurs starting a business often overlook this critical part of running a business.  Protecting your company with business insurance is not something you should ignore! You want to have insurance in place to protect your business’ tangible or intangible assets against:

  1. Loss due to theft –  includes theft by your own employees – sadly, this happens!
  2. Loss of profits or revenues – as a result of various factors interrupting your business
  3. Legal liabilities –  if the actions or negligence of your business causes losses, harm or injury to another person or business (a third party), you may be required to compensate them. Your business insurance may cover different types of liability. 
  4. Losses and liability from cyber attacks –  if your business systems are breached by hackers and you or a third party incur losses, your business insurance may cover this.
 

Consult with your lawyer and insurer to know exactly what liabilities are covered under your business insurance policy.

Essentially, your business insurance will help protect you in case someone decides to sue you or your business for any reason. For even more protection, it’s smart to look into business insurance policies that also cover both product liability and public liability.

Opening a Business Bank Account

Businesses in South Africa need to have a business bank account. Banks typically require a set of documents for them to open your business account for you. Generally, the documents they need are as follows:

  • A Valid Government-issued ID document for the business owner and all other signatories on the account
  • Current proof of address for the company. This may be a utility bill, and if you’re a sole trader, this will be your residential lease or the deed for your home.
  • Three months of business statements may be requested, but this is waived for brand new businesses.
  • Proof of company registration obtained from the CIPC 

You are not alone on your business journey… you have help!

Starting your own business can be a daunting task, and as we’ve shown in the insights above, it is easy to miss something. But do not fret! You have support. Get in touch with us and one of our specialists will walk you through all the requirements from start to finish. We are able to handle all of the registrations outlined in this post, from company registration to SARS requirements. 

Beyond just handling your registrations and compliance matters, we can also help you draft or optimize your business plan and clarify your business goals and strategy. Further, we are able to assist you with the important task of raising capital to fund your business. At the very least, we will put all your options in front of you so that you can make informed decisions.

Set up a no-obligation phone or in-person appointment with us today so that we can answer any questions you may have about starting a business in South Africa. At Kettle Consulting, we have the experience and expertise to help you start, run and grow your business.

Takeaway

Starting a new business is certainly exciting for the passionate entrepreneur! The key to success is to be intentional about success from the very beginning, and that means taking care of the regulatory and administrative concerns from day one. Whether you are planning to launch your business as a sole trader, starting a partnership with a trusted colleague or friend,  or going with a private limited company, all of these entity structures have rules and regulations that you will need to adhere to.

Make sure to take full advantage of the insights in this guide to educate yourself about the finer details of starting a business. This will give you an excellent chance of success on your business journey. 

And remember, you have support. Get in touch with us today to discuss next steps for your business registration, business plan, capital raise, tax, compliance and any other concerns you may have.

To speak to an advisor, reach us via telephone 011 025 1446  or email us at info@kettleconsulting.co.za.

Insights by:

Kettle Consulting

Knowledge Desk

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