Reasons not to register a company for my business
Previously we discussed the difference between a business and a company. Now its time to decide whether your business should run using a company structure or whether to keep it simple as a sole proprietor. When we use the fancy term “sole proprietor” we simply mean that you personally are the only owner and manager of the business and you are in fact the business. Even if you call business AAA plumbers, or ABC consulting, if the customers are paying into your private bank account and you have not created and registered a company with the CIPC, then you are a sole trader or sole proprietor – these last two terms mean the same thing.
In South Africa, anyone can start and create a business by simply selling a product or service and getting paid for it. You have a business without doing a thing and your only obligation at this stage is to declare any profits you make to SARS in your annual income tax return.
In our next post we will deal with several reasons why it would be a good idea to register a company, but in this post we are going to focus on the reasons not to register a company.
Reason 1 – Administrative burden.
In order to create and register a company you will need to go to the CIPC website and register as a user.
Note that as of November 2019, the Government was working on another simplified website to do this task, but it is supposedly not yet operational, so watch this space for updates.
Once you have registered you will need to provide information on the shareholders, the directors and the accountants. Then every year you will have to submit information about your company to the CIPC using an online form and make an annual payment to keep the company registered. In addition you will most likely need an accountant or auditor to sign off your accounts each year.
Now that you have created this new company entity, you will have to make sure that it submits its tax returns each year and its provisional tax returns twice a year.
Once you have done these tasks a few times, they can be done quite quickly, perhaps a few hours for all of them combined each year. However your first attempts are going to be fraught with indecision and frustration as you try and figure out how to fill in the forms and make sure that you have all the correct information.
Companies should also keep records of meetings such as AGMs and meetings where important resolutions or decisions are made by directors and managers. They need to keep records of shareholdings and directorships and the changes that occur in them which will have to be notified to the CIPC each time.
Reason 2 – Additional costs
This reason is very similar to the first one, which mostly focused on the time and effort required. However there is also the extra cost of running a company such as the annual return fees and accountant fees. In addition you will most likely need to pay for advice and help on things such as your tax returns and your company secretarial duties.
SARS will also expect you to have a separate bank account for your new company. Each month your bank will charge you around R100 as a service fee to keep your bank account active. This is fine if your business is busy, but it is an additional cost if things start off a bit slowly and you don’t make many sales, or heaven forbid, none.
Reason 3 – Gives no additional advantage
For very small businesses with only one person and who’s customers are individuals or other small businesses, there is pretty much no advantage to invoice them as a company rather than as a sole proprietor. They quite simply don’t really care as long as they can be convinced that your product will work or that your service will do as promised. So why go to extra effort and cost for no benefit?
Reason 4 – Great for the early phase of a business startup.
When your cash is low and you’re spending all your time on finding new customers, you don’t want to be distracted by unnecessary tasks of little benefit. Focus on the core of your business first. Get your product working properly and get customers interested and buying. Once you see that your business idea actually works and might make money you can start getting more complicated by registering a company. In the early stages before you have assets, liabilities, staff and contracts, it is easy to change from trading as a sole proprietor to trading as a company.
In our next post we will look at reasons why you should register a company for your business to trade out of.