A sole proprietorship is a business that is owned and operated by an individual and is the simplest form of business entity.

A sole proprietor cannot be classified as a legal entity as it has no legal existence separate from its individual owner.

This means that you are the business and the business cannot be separated from you.

As there is no separate legal entity, all business income and expenses must be included in your name.

Therefore your taxable income will be taxed on the sliding scales applicable to individuals.

Only the proprietor has the legal authority to make decisions on behalf of the business as you are not able to appoint any directors.

You can however appoint personnel to perform crucial functions in order to run your business.

Running a business as a sole proprietor has the same implications as would be applicable for any other type of entity because you are still liable for tax.

Should you appoint employees, you will be required to register for PAYE, UIF and SDL.

You can also register for VAT if you are trading as a sole proprietor.

There are however definite advantages and disadvantages in operating as a sole proprietor:

Advantages :

• The owner is free to make decisions as he/she pleases.
• Easy to discontinue the business.
• Being a sole proprietor/self-employed leads to a simpler life and an easier way to start a business.
• Simple and cost-effective to set up.
• No company formation fees or formal registration involved.
• Lower accountancy fees in most instances.
• No need to file annual returns with CIPC.
• You are not obligated to appoint an accounting officer/auditor.
• You don’t have to adhere to the requirements as set out in the Companies Act.
• You are not obligated to compile and submit annual financial statements to SARS that need to be signed off by an accounting officer or auditor.
• You qualify for tax rebates which are not applicable to companies.

Disadvantages :

• Higher personal risk – you are personally responsible for the company’s debts which mean that your personal assets can be at risk.
• Limited ability to raise capital.
• Fewer opportunities for tax planning.
• The owners’ personal assets (house, motor vehicle, etc.) are not separated from those of the business.
• Perceived to be informal compared to a company and might therefore have difficulty to get on vendor lists of bigger companies.

SOURCES :

Cronje & Cronje

Business Partners