Trading as a sole proprietor or registered company – which is best for your import export venture?

There are various ways in which your import export business can operate. The most common are a sole proprietorship, when you’re trading in your own capacity, and a private company. Each has benefits and disadvantages. Here’s what you should know before committing to either:

Option 1: Sole proprietorship

When you do business in your own name, without any formal business registration, you are a sole proprietor. All employees would be working for you directly, and any registration you require, like your import export license, would be in your individual capacity, linked to your ID number.

Benefits of a sole proprietorship

Quick and simple to set up. No official business registration is necessary, but it is advisable to open a separate business bank account in your personal name.

You can use a trading-as name. Just because you are trading in your personal capacity doesn’t mean you can’t come up with a nice name and branding concept. Just be aware of the Consumer Protection Act’s guidelines on trading-as names.

If your earnings are low, you benefit from better tax rates. Individuals (and by extension sole proprietors) are taxed on a sliding scale, which means the rate of tax you pay increases as your earnings increase. Companies are taxed at a flat rate of 28% plus 20% on dividends paid out to shareholders. Depending on which tax bracket you fall into, paying tax as an individual may therefore ensure a healthier bottom line.

Be mindful: If you are running a sole proprietorship in you spare time whilst earning a salary the additional income may push you into a higher tax bracket. You may however claim legitimate business expenses to reduce your income, such as rental of a home office space.

Have a question?

Get in touch

Blog page

  • This field is for validation purposes and should be left unchanged.

Disadvantages of a sole proprietorship

There can only be one owner. This can be a benefit or a disadvantage, depending on how much of the responsibility you’d like to share.

You are personally liable. Any dept or legal dispute your business incurs is your liability. If it comes to a bad dept, your personal property is therefore at risk.

Tax can get messy. All the business and personal taxes you incur must be declared on your personal income tax profile. Although this is not a problem, it does mean you’ll have to keep careful tabs on your bookkeeping, even when it comes to you own recreational expenses. You’ll have to register as an individual taxpayer and as a provisional taxpayer. This involves three (3) tax returns due per tax year:  2 provisional tax returns (estimate figures) and the final annual tax return (actual final figures).

The business can’t change ownership. Trading as a sole proprietor gets complicated if you should wish to retire from the business or sell it. You can sell the assets required to run the business (like tools, stock and equipment), but as there is effectively no registered entity that can change hands, you can’t transfer ownership of the business itself. For the same reason, any registration that you got in your individual capacity for the sake of running your business, like your import export license would also be non-transferable.

The structure dissolves when you die. As there is no divide between the business’s financials and your own, all the business’ accounts will freeze in the case of your death, which puts employees at risk of non-payment. Any registrations in your individual capacity also fall away in the event of your death, which would halt operations.

When a sole proprietorship makes sense

  • When the business is a low-income venture or side hustle that doesn’t validate the added tax expense of a registered company.
  • When you are testing out a new business idea and want to see whether it makes profit before formalising it.
  • When you are the sole owner and operator, and you don’t foresee the business growing beyond that.
  • When the business is a temporary arrangement, for example if you’re selling goods in a fundraising effort that will stop once the goal is met.
  • When you’re selling your skillset only. For example, if you are a consultant, designer or performer and the whole service effectively consist of your time and/or insight.

Option 2: Private company (Pty) Limited

A private company is treated by South African law as a separate legal entity and must register as a taxpayer in its own right. A Pty Limited is owned by one or more shareholders and run by one or more directors.

Benefits of registered company

Your personal assets are safe. Shareholders of a company have limited liability meaning that, should the company become insolvent, creditors can’t claim from the shareholders in their personal capacity.

Your brand is protected. Your company’s registered name may not be registered again. In addition, if someone else should use your registered name as their trading-as name, you are within you right to press charges against them.

You can apply for financing. Generally speaking, business loans are only available to registered business entities. Unless you can cover start-up costs with your savings, registering a company would therefore be step one in any business venture.

If are high earning, you get a better tax rate. For the same reason a low earning business is better off as a sole proprietorship, a high-income business should avoid it. Registered companies benefit from a limited income tax rate of 28% plus 20% of dividends paid out to shareholders. You may find the tax benefit of trading as a sole proprietor or registered company changes as your business grows. Lots of businesses operate as a sole proprietorship and grow to a point where paying individual income tax is no longer finically beneficial.

Ownership of a company can change. The company itself, including all its assets, liabilities and registrations can be sold or transferred to one or more new shareholders without incurring disruption of its financial position or operations.

Disadvantages of a registered company

More accounting responsibility. In addition to your own tax returns you’ll have to file provisional and annual income tax returns for your company. Ultimately this is true whether you’re trading as a sole proprietor or registered company, but in the case of a company you’ll be working on two different tax profiles.

Registration renewal. Your registration with the Companies and Intellectual Properties Commission (CIPC) requires annual renewal.

Shared control. All legal commitments made by the company must be signed by all directors. This can be tedious if the company has multiple directors. However, if you register a company and make yourself the sole director, you have all the control to make discissions and commitments quickly and easily.

When registering a company makes sense

  • When you intend to employ staff. For the protection of your workforce a company provides a more stable arrangement.
  • When your business pushes your personal finances into a high tax bracket.
  • If you want to attract investors. A registered company looks more serious and professional on paper than a sole proprietorship, which is a benefit when you are approaching potential investors or applying for financing.
  • If you want to play in the big leagues. Many customers and suppliers prefer to deal with a company as opposed to an individual. Being registered allows you to pitch for business to larger corporates and government.
  • If you’re building a company to sell. You may be building a business with the ultimate intention of selling it off and retiring to a tropical island. This can only be done if the business is officially registered and can therefore change hands.

In conclusion, whether you are better off running your import export venture  as a sole proprietor or registered company depends on your level of commitment, and your business goals.

Find more help with your import logistics, original resources, leading-edge training, and assistance with customs licenses on Trade Logistics.