I often get approached by budding entrepreneurs wanting to start their own business. Many dream that owning their own business will bring them financial independence, the fulfillment of a lifelong desire; being masters of their own destiny. All too often the dream becomes a nightmare. The stark reality is that few business ventures succeed. Studies show that fewer than 50% of all business startups will survive 3 years, 20% will survive 5 years and 10% will survive 10 years. The odds are not in your favour...
Now that you know what risks lie ahead we will try to provide you with the tools to navigate you to financial success through a series of practical “how to” guides – the business survival toolkit.
Successful businesses, be they big or small, have many elements in common. Initially they all start with a dream or an idea. We hope to show you how to take that idea and convert it into a fledgling business and grow that into a viable business using the “diamond” model, illustrated below.
Setting up your business initially involves a significant amount of red tape. The first decision you need to make is deciding on the legal form you will use. In South Africa your options are:
1. Sole proprietor
Also known as a sole trader. It is simply that you start trading as yourself. For example, you could fix peoples cars for which they pay you. You are running a business, but there is no need to create a company name or structure. This is the simplest form of business and requires virtually no effort to set up and get going. You do need to inform the tax man of your extra income, although this will often be offset by business expenses. The biggest risk for this structure is that if the business fails, your creditors can take all your assets: your house, your car, your furniture – everything to recover the money you owe them, because you are the business. You cannot have partners as a sole proprietor, only employees.
So in summary this structure means you are the business and no new entity is created. The new Act allows you to trade in your personal name, but if you start the business now and want to have a trading name like “A plus plumbers” or “ABC Consulting”, then this name will have to be registered with the CIPC.
When two or more sole proprietors decide to go into business together, they form a partnership.
3. Private company
Also known as a Pty Ltd. This is now the most likely structure for entrepreneurs who want to have the advantages of running their business as a company. Essentially a new entity (think of it as an imaginary ‘person’) is created and names, called a company.
This entity is separate from you personally. It will have the owners (shareholders) which may be one or more persons who own the company and the managers (directors) who run the company. Sometimes these are the same people, but not necessarily.
These companies are registered with CIPC and each year an annual return must be submitted to them to ensure you are still trading. Smaller companies will require an annual accounting review to be done by an accountant, which is a much simpler and cheaper version of an audit.
The advantage of trading as a company is that it gives you a more professional image and being reviewed by an accountant can help ensure that you are running things properly and following the law – particularly when it comes to certain taxes. You are also able to have other companies or similar legal structures that are shareholders of your company. It allows several people to get together and share in the ownership of a business and makes it easier to sell portions or all of it to future buyers. There is also the element that the debts of a company generally belong to the said company. So if things go wrong and you haven’t traded recklessly, you only lose your investment and not your private assets too.
The registration procedure for a private company involves a detailed process and due to the complexities of the procedures involved, the services of an experienced professional is recommended for use in the registration process.
Other registration requirements
Whatever your structure you need to be aware that the Government will still require you to register for income tax, VAT, UIF, PAYE and to apply for certain licenses depending on your industry, your size and whether you are employing staff.
There a number of useful guides available on our Moore Stephens.
Wow – that’s quite a list but getting the first step right is critical to your future success. Take short cuts during this all important stage…. and you will pay the price later.
This article was written by Olivier Barbeau. Olivier, a chartered accountant, is Office Managing Partner and Member of the Executive Committee of Moore Stephens South Africa. Moore Stephens South Africa, which has been in operation since 2003, is part of the Moore Stephens International Network, a major accounting and consulting network with 299 independent firms, and 624 offices in 101 countries. The company strives to provide sensible advice and tailored solutions, assisting with the financial, advisory and compliance needs of their clients, and ultimately helping them to reach their commercial and personal goals.