I’ve had a lot of questions about Sole Proprietorships lately and decided to write this article to answer the most common questions I’ve come across.
Question: What is a Sole Proprietorship?
It is a business that is in the name of the person who operates it. This is the simplest form of business, where the individual owns all the assets of the business, but are also responsible for all its liabilities.
Question: Do I need to register the business with CIPC?
No, it is not required, you can begin trading immediately.
Question: Do I need to open a bank account for the business?
Yes, it is best to keep a separate bank account to easily differentiate between personal and business expenses.
“In this world, nothing is certain except Death and Taxes”
Ben Franklin, 1789
Question: What taxes do I have to pay?
If you are already registered with SARS for personal income tax, then you need not worry to register your business, as the business itself is not taxed separately on its income but rather it is added together on your tax return along with any other income you may have earned during the year.
You will need to register for provisional tax if your taxable income for the year is above the tax threshold for the particular year.
If you are going to employ staff, you may be required to register for payroll taxes.
PAYE is payable if your employee earns more than the tax threshold for the particular tax year.
UIF is payable if an employee works more than 24 hours a month. The amount payable is equal to 2% of their salary (1% deducted from employee and 1% contributed by the employer). You will need to register with the Department of Labour as well.
Skills Development Levies are determined by the total salary account for the year. Therefore it is only payable if your total salaries are expected to be more than R500 000. The amount payable is 1% of the total salary paid to the employee.
Along with registering for payroll taxes, you will also have to submit a monthly EMP201 and an EMP501 twice a year.
If you expect the turnover of your business will exceed R1 million in a 12 month period, you should register for VAT. You are required by law to become a vat vendor if your turnover is R1 million and more.
Question: What expenses can I deduct?
As a sole proprietor, you can deduct all business-related expenses.
Typical expenses include Accounting or bookkeeping costs, delivery and freight, depreciation on business assets, electricity and water that is associated with your business premises, entertainment, for example, food and beverages to entertain customers and/or suppliers, insurance costs such as insurance on your office building, licences that apply to the business, maintenance and repairs on business equipment or the office, motor vehicle expenses such as repairs and maintenance, licences, subject to a proper logbook kept, security costs, postage, printing and stationery, rent, rates and taxes on leased equipment and business premises, subcontractors, telecommunication such as cell phones, landlines and internet.
Some of these expenses may be for personal as well as business use, but only the business part is tax-deductible.
Question: Can I deduct home office expenses?
Yes you can if the following apply:
You spend more than 50% working out of your home office, your home office is exclusively used for your business and it is properly equipped for you to run your business.
Typical home office expenses include rent, interest on a mortgage bond, repairs to the home office, electricity, rates and taxes, cleaning costs and security.
To calculate the percentage take the total square meterage of your home office in relation to the total square meterage of your home (including outbuildings) and apply this percentage to the expenses.
Key points to remember:
Always keep proper records of all the income and expenses including receipts.
Differentiate between personal and business expenses
Keep a separate bank account for your business.