So you are a sole proprietor or a freelancer, you’re doing quite well and business is good When is the right time to form a company?
This, for me, comes down to four specific areas to consider :
1️⃣ Tax and Turnover
3️⃣ Brand Appeal
Tax is the easy part. If you will pay more in tax then maybe it’s not the right choice. You will need to chat to an accountant as Company Tax involves a big picture analysis – no, it’s not as simple as “individuals pay up to 45% while companies only pay 28%”
You need to consider company tax, small business tax rates, dividends tax, personal al Paye, etc.etc.etc.
So my advice is when you pay more than R20,000 a year towards your personal tax, look at a company. That’s what it’s going to cost you to run a company in accounting fees. So at this point, chat to your accountant.
Once your Turnover reaches R1 million, look if it’s time to register as a company. This is when you need to register for VAT. So by now, you’re not a little business anymore, so don’t think like one!
When you’re Suppliers start mentioning that they prefer, or only, deal with a registered company, then look at forming one. You don’t want to lose business!
Consider your Brand Appeal. Are you giving the impression of a fly-by-night business, are you looking like an amateur when everyone else in your industry is one step ahead.
A registered company can be traced, it has tax commitments, it just has the impression of being organized and official. If you are aiming to take over the world and grow your business into a market leader, consider the impression that a company will give.
Lastly, consider your Risk. If you are incurring large debts, liabilities or getting involved in partnerships, form a Company.
It moves (mostly) the risk from you personally to the Company. With partnerships I always, always recommend a lawyer to make sure your interests and intentions are clearly explained in a contract, but a lot of protection is given in terms of what Directors can and cannot do.
And a Company is not a free license to fail and walk away, but there is a certain measure of protection not granted as a sole proprietor.