Choice of Business Structures in South Africa : Sole Proprietor : PART 5
27 January 2017

– Summary

The South African company system is well developed and regulated. Here we discuss the advantages and disadvantages of a Sole Proprietor.

In this article, we will deal with SOLE PROPRIETORS.

Other articles will deal with:

A sole proprietorship is the simplest form of business structure in South Africa and many small businesses operate as sole proprietors. One person (“the proprietor”) owns and manages the business and is responsible for all business transactions.  A sole proprietorship can be set-up and can start trading immediately and will often do business under a “trading as” name.  However, a sole proprietorship does not offer the same security that comes with entities like private companies, particularly as they are not separate legal entities in the eyes of the Law.

Advantages and disadvantages are the best way to determine if being a sole proprietor best suits you.

ADVANTAGES OF BEING A SOLE PROPRIETORS

DISADVANTAGES OF BEING A SOLE PROPRIETORS

Set-up

They are relatively cheap and quick to establish

There are no legal formalities to establishing sole proprietorship (e.g no registration with CIPC).


Flexibility

There are few formal business requirements.


Profits, Responsibility and Decision Making

Sole proprietors take all profits for themselves and do not need to share responsibilities and decisions with any other person.


Taxation

Only the sole proprietor himself/herself is taxed; the business is not taxed separately.


Audits

There are no statutory requirements that a sole proprietor is audited.

Unlimited Liability

Probably the biggest disadvantage of being a sole proprietor is you are subject to unlimited liability, which means you share the liability and financial risks of the business.  Any claim a creditor has against your business is your personal responsibility too.


Taxation

The way sole proprietors are taxed can also be a disadvantage.

For example, all profit from the business activities is attributed to the sole proprietor which affects your taxable income and can lead to paying higher taxes and falling into a higher tax bracket.  This is opposed to companies, that can retain profit in the company and will pay the flat company tax rate regardless of income.


Raising Capital

Raising capital can be a problem for a sole proprietor as a potential loan is determined by the proprietor’s personal income and assets only.

This can also be an advantage as loans from a financial institution as simpler to complete if submitted in your personal capacity.


Skills

One person alone obviously has limited skills, which can affect the growth of the business; however, this disadvantage can be mitigated by employing staff or contractors with the required skills.


Life Span

A sole proprietorship lasts only as long as the sole proprietor is trading or alive.

 
Being sole proprietor shares many advantages and disadvantages with partnerships, principally the issue of unlimited liability; generally, we advise that individuals wishing to conduct business in South Africa do so through a Company.

DISCLAIMER: THERE ARE MORE CONSIDERATIONS THAN WE CAN COVER IN THIS ARTICLE SO ONLY USE THIS INFORMATION AS A GUIDE.   THIS INFORMATION DOES NOT CONSTITUTE LEGAL ADVICE.  IT IS ALWAYS BEST TO DISCUSS YOUR SITUATION WITH AN ATTORNEY; CONTACT US AT 0861 88 88 35helpdesk@gcm-legal.com AND THROUGH THE CONTACT FORM ON THIS PAGE.

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