Welcome to April folks! This month we’re going to be exploring questions we’ve had around making your business official. From company registration and VAT to letterheads, business cards and job titles. It’s all here this month so be sure to check out our newsletters to learn more.
Company vs Sole Proprietor
We often get asked by our merchants about registering a company, so what is it that you need to know?
A Company is a legal entity formed to carry out business. It is responsible for its own expenses and income, can own property and of course can be required to pay taxes. A Company can be owned by a single individual or multiple people and places limited liability on each of its shareholders. Basically this means that the shareholders can generally not be held liable for the debts of a Company, so a Company is its own legal person.
A Sole Proprietor is different from a Company in that there is a person held liable for the debts of the business, as the business owner is the guy who gets all the benefit from the business. In the case of the Sole Proprietor, the owner is the legal person and the business belongs to him alone.
Its important to note that its not necessary for you to register a company in order to start or run your Shopify store. In fact, most of our Shopify stores start out as Sole Proprietors selling their products online and continue as Sole Proprietors without registering the business.
So should I register my business?
As a merchant that is entirely your choice. If you find that running your business as a Sole Proprietor works for you, then keep doing it that way. Most Sole Proprietors will, however register the business in the following instances:
- Risk exposure – If you find that you need to undertake big risk for your business, it might be time to register. Ask yourself “Can the risk here cost me more than just my business?”
- Tax purposes – In some instances, it may be beneficial to you or your business to register a company to pay less tax. South African tax law provides certain tax breaks for registered companies that meet certain criteria. These tax breaks may be beneficial to your business, but you may need to register to take advantage of them.
- Credibility – Sometimes, having a registered company can provide you with credibility to your customers and suppliers. If you find that a big supplier or customer is asking for company registration details, it may be time to register.
What type of company should I register?
In South Africa there are a few different company types you can choose to register. Each type differs slightly in structure and in the way they are run. The most suitable types of companies for Shopify merchants are the following:
- Private Company – Private companies are the most common types of companies. They are owned by between one and fifty shareholders and are run by nominated directors which must be actual people. It is the most common type of company because there are fewer annual formalities than some of the other types. All private companies names end in “(Pty) Ltd.”
- Public Company – Public companies are those that are listed on a securities exchange and whose shares are bought and traded by the public. Ever heard of share trading? Generally this refers to shares of public companies that are being traded. Public companies also have directors and are generally very complex in structure. All Public company names end in “Ltd.”
- Business Trust – A business trust is a legal entity in that it is a trust set up for the purpose of doing business. It has no shareholders but beneficiaries instead. In a business trust then, the beneficiaries are the people in the business who benefit. There are fewer legal requirements than that of a private company but the tax rates in a business trust are generally much higher than a company. Business trusts are also more expensive to set up as they are registered with attorneys.
If your business is reaching the point where you need to register it, the best advice would be to do your homework and decide which type of company you are going to register. Speak to your accountant, speak to other business owners, learn the differences and then decide.
In next week’s newsletter we’ll be talking about VAT and how to ensure that your taxes are kept to a minimum.