You have prepared for months to start a business. You have done your research and identified your target market. You have a unique product with much potential. Now it's all systems go and start making money. Or is it?
Before starting a business, essential steps need consideration if you are serious about your small business and have a vision for it to grow into something worthwhile. Let's have a look.
Step 1: Legal form when starting a small business
The first step is deciding in which capacity to operate your business. You can trade as a sole proprietor (i.e. doing business under your own name) or as a legal entity. Both have their advantages and disadvantages.
Sole Proprietor
Trading as a sole proprietor requires no registration and costs no money. You are free to use any business name. The main disadvantage is that other people can use your business name.
Legal Entity
Trading as a legal entity requires registration with the Companies And Intellectual Property Commission (CIPC). The registration will come at a cost. The benefit is that you can reserve a business name that nobody else can use. The most popular form of legal entity for small businesses is a private company.
Step 2: Tax Compliance
Whether you do business as a sole proprietor or a legal entity, the taxman wants their piece of the pie. There are different types of taxes applicable to small businesses. These are the most important ones.
Income Tax
Trading as a natural person requires no additional registration for income tax. Your business's profits will be declared as part of your personal income tax return at the end of the tax year.
A legal entity must register for an income tax number at the South African Revenue Service (SARS) and submit a yearly income tax return. The tax rates for a legal entity differ from a natural person. An accountant can help with the income tax of your business.
Value-Added Tax (VAT)
Another type of tax that gets easily confused with income tax is Value-Added Tax (VAT). VAT is an indirect tax levied on the use of products and services. Registration for VAT at SARS is compulsory when revenue exceeds or expecting to exceed R1m within twelve months.
Pay As You Earn (PAYE)
Pay As You Earn (PAYE) is an employee's tax deducted from monthly salaries. If you have employees, you must register for PAYE at SARS.
Step 3: Labour Compliance
If you employ people, you must comply with the Unemployment Insurance Act (UIF) and the Compensation for Occupational Injuries and Diseases Act (COIDA). Employers must register at the Department of Labour (DoL).
UIF
The Unemployment Insurance Fund (UIF) provides temporary relief for workers who become unemployed or cannot work due to maternity, adoption, parental leave, or illness. A monthly UIF return must be submitted and paid to the DoL.
COIDA
According to the COIDA, all employees must register with the Workmen's Compensation Fund and pay annual compulsory insurance for their employees to the DoL. The fund compensates employees who get injured or contract diseases throughout their employment.
Step 4: Accounting Records & Bookkeeping
Whether administration is your strong suit or not, keeping accurate accounting records is critical for bookkeeping. Bookkeeping keeps track of your business's progress and compliance with regulating authorities.
Bookkeeping, with the use of accounting software, summarises financial information (income and expenses) from the accounting records to prepare financial statements and tax returns.
Step 5: Business Bank Account
Open a business bank account as soon as possible. You want to keep your business and personal finances distinct. It will simplify the bookkeeping process and save you (or the bookkeeper) hours of frustration.
Whether you trade as a sole proprietor or a private company, you can open a bank account in the name of your business. All commercial banks in South Africa make it easy for small business owners to open business bank accounts.
Final Thoughts
Getting the basics in order is the first step in making your business successful. The legal form of your business is essential when considering tax and protecting your assets. Compliance with tax and labour laws is critical for doing business legally. You can measure your business's performance by keeping accurate accounting records and using a business bank account. Check out the further reading section for more detail on specific topics.
Further Reading