Can SARS tax you even if your business is not registered?
The answer is YES. If you are running a business that is not registered, you are basically a sole proprietor.
What Is Sole Proprietorship?
A sole proprietorship is defined as a business that is owned and operated by a natural person (individual).
This is considered the simplest form of doing business. It simply means the entity is not legal (registered) and has no existence separate from the owner who is called the proprietor. Although a sole proprietorship can operate under the name of its owner or give a business’ fictitious name, the name does not create a legal entity separate from the sole proprietor owner.
Pros and Cons of Sole Proprietorship
Sole proprietorship obviously has some pros and cons. Here are 3 pros and cons:
1️⃣Simple to establish, operate or even discontinue the business.
2️⃣Owner is free to make decisions.
3️⃣Owner receives all the profits.
1️⃣The owner is legally liable for all the debts of the business.
2️⃣Limited ability to raise capital, which limits the expansion of a business when new capital is required.
3️⃣The owner alone has limited skills, they may need to hire employees with sought-after skills.
What Is Most Tax Efficient?
Sole Proprietorship vs LTD (PTY)
It all boils down to expected earnings from your business.
Individuals are taxed on a sliding scale, which means that the rate of tax you pay increases as your earnings increase. This applies to any individual earning more than R87,300 per tax year.
In a company, profits are taxed at a rate of 28%, irrespective of the value. Plus, dividends tax is levied at 20% on profits retained in the company and distributed as a dividend in the future.
In A Nutshell…
As an individual earns more, you move into the higher tax bracket. The difference in tax between a company and a sole proprietor decreases. At a lower level of taxable income, it’s more tax-efficient to operate as a sole proprietor and enjoy the benefits available to individuals. At higher income brackets, it’s likely that company registration would be more beneficial.
This should help you make a better decision if you were stuck between registering your business and operating it individually. For business registrations and taxes, please do get in touch with us 📲