Setting up a business in South Africa

Why do business in South Africa?

The reasons that make it attractive are:

A dynamic market with a growing middle class and a financially well-off consumer base that allows for good returns on investment.
The most diversified and industrialized economy on the continent. It is also a prime destination for the goods and services sector.
South Africa has the largest number of multinational companies on the continent.
Numerous trade agreements are in place, creating a platform for exports to global markets.
Its banking and financial sectors make it the financial center of Africa.
South Africa has world-class infrastructure, international airports, seaports and the largest logistics networks on the continent.
A young, enthusiastic and diverse workforce, educated at South Africa's world-renowned universities.
Excellent quality of life, a pleasant year-round climate and a very favorable cost of living.

The government's economic policy is focused on attracting investors to create development, employment and economic growth. In order to attract domestic and foreign investors, the government has put in place measures to facilitate business start-ups, tax incentives (especially in the tourism sector), export incentives (including partial state compensation of export costs, subsidies for specific sectors), and credit facilities for the export of capital goods are offered by the Industrial Development Corporation.

How do I choose the right business structure in South Africa?

The most appropriate approach to the project is the first thing to consider when starting a business or making an investment in South Africa. The structure of the company will depend on a number of factors:

the number of participants in the company.
management and control policies.
the limited liability of the participants.
taxation.

These factors will determine the most appropriate investment and corporate structure. The different business structures are:

not-for-profit corporation.
branch or subsidiary of a foreign registered or external company.
sole proprietorship
private limited liability company
public limited liability company
partnership
private company (no longer an option for new businesses).

Choosing the right structure can have an impact on the tax rate, the ability to raise capital and the B-BBEE (Broad-Based Black Economic Empowerment, a government initiative to address apartheid inequalities by encouraging companies to hire employees of color) strategy. It is imperative to make the right decision and choose the right structure. For this, it is highly recommended to be assisted by a chartered accountant.

Non-Profit Corporation (NPC)

Non-profit corporations are for the benefit of the public. A minimum of three people is required for incorporation and there are no shares to be transferred to the public. NPCs can generate profits but these profits cannot be returned to the shareholders.

Subsidiary of a foreign registered or external company

This refers to companies that already exist outside of South Africa and wish to open a subsidiary in South Africa. The shareholders do not have to be resident in South Africa, but a manager must be appointed, and an auditor appointed. Profits can be returned to the international company after payment of tax.

Sole Proprietorship

The easiest way for a single person to start a business is as a sole proprietorship. They simply market their service or product. They can operate under their own name or under a trade name. The sole proprietor is not a legal entity, uses his or her own money and assets, and assumes the risks of business transactions. Sole proprietorships do not need to be registered with the Companies and Intellectual Property Commission (CIPC).

The business may have employees who must be registered with the Department of Labor for the Unemployment Insurance Fund (UIF) and the Compensation Fund.

The sole proprietor is taxed as an individual and the sole proprietorship is not registered as a corporation with SARS.

Employees must be registered with SARS and, depending on tax schedules, the business must pay Pay As You Earn (PAYE) taxes.

Advantages of a sole proprietorship:

Fairly easy to set up and operate.
Fairly easy to close or stop the business.
Owner receives all profits. Owner makes all decisions.
No CPTC registration and, therefore, few legal requirements for set up.

Disadvantages of a sole proprietorship

One owner means that skills are limited but can be supplemented by those of employees.
The owner is responsible for all debts of the business.
The ability to raise more money (raise capital) depends on the owner's personal ability to secure the money.

Private Limited Company

A private limited company - (proprietary limited or Pty LTD) is a separate legal entity. This means that it has a separate life from the director(s) and has rights and duties of its own. The company must be legally registered with CPIC and SARS and will receive a company number and a company tax number.

To start a private company in South Africa, only one person is required as a director and a founder (who can be the same person). There is no maximum number of directors. The director(s) are the shareholders, and the employed officers may or may not hold shares in the corporation. The liability of a member is limited to the amount contributed to the capital.

There is no minimum capital required to start a private company.

The Private Company may employ staff. Permanent staff will need to be registered for the UIF/CF (Compensation Fund) with the Ministry of Labor. The permanent staff will also need to have a SARS tax number.

Once the company is registered with the CPTC, it will automatically be registered with SARS and will receive a tax identification number and is required to submit an annual report to SARS.

Advantages of a private company

A private company has an easier time obtaining financing or raising capital.
The company can exist forever as long as it is CPTC compliant. This status is suitable for small, medium and large companies.
The company has a MOI (Memorandum of Incorporation).

Disadvantages of a private company

Although a separate legal liability, SARS has imposed certain tax payment obligations on shareholders, directors or officers who are directly involved in the financial affairs of the company.
In addition to being a separate legal entity, directors and management may also be held liable for the debts of the corporation where they have been imprudent in the management of the business.

Public Limited Liability Company

Public companies are allowed to offer their shares to the public. The management of these companies is entrusted to a board of directors. Once registered, the name of the company is followed by "Limited" or "Ltd". A minimum of 3 directors and one shareholder is required but there is no limit to the number of members or the transferability of shares in a public company. Only public companies can be listed on the JSE Limited (Johannesburg Stock Exchange).

Partnership

This is when a minimum of two and a maximum of twenty people come together on the basis of an agreement to start and operate a business with the aim of generating income and making a profit. For example, lawyers or doctors may join together and form a business partnership.

Each partner is considered an owner and can bring money, skills, and assets to the partnership.

The partnership is not considered a separate legal entity and, therefore, the active partners are jointly and severally liable for debts, and if there are any, all partners are liable to pay them. The liability of the passive partners is limited to the amount contributed to the capital.

The Partnership does not need to be registered with CPIC. The Partnership may have employees but must register permanent employees with the Department of Labor, the Unemployment Insurance Fund (UIF) and the Compensation Fund (CF).

Each partner is responsible for taxes based on the share of profits. The Partnership itself is not a legal entity and is not registered with SARS as a corporation.

If the partnership has employees, then it is responsible for paying PAYE (Pay As You Earn) taxes for the employees.

Types of partnerships:

General Partnership: this type of partnership is publicly known and the partners are jointly and severally liable for profits and losses. This means that they must cover the debts personally.
Extraordinary or Anonymous (dormant) Partnership: In this type of partnership some or all partners are not known to the public. This means that they remain anonymous.
Limited Partnership: "The partner is purely a financial actor with limited liability, similar to a shareholder in a company. They share in the profits and losses, but their liability is limited to their specific contribution or an agreed amount. (SARS 2020)

Advantages of a partnership

No need to register with the CPTC.
No legal audit requirements.
Partners share costs and risks.
Each partner brings expertise. Combined skills strengthen the partnership and can be more effective.

Disadvantages of a partnership

All partners are liable for the debts of the partnership. This means that they are all personally liable to pay their creditors (according to their share agreement).
If a partner leaves the partnership or dies, the partnership is dissolved. The Partnership must then be re-established.
The partnership requires more effort if there are differences in decision-making.

Closed Partnerships

This concept was introduced in 1985 and was intended to provide a simpler and less expensive legal entity for a single entrepreneur or a small group of up to 10 entrepreneurs. A private company is not subject to the same legal requirements as a corporation (e.g., it is not required to have its annual financial statements audited or to hold annual general meetings), and it exists separately from its members who enjoy limited liability. This is no longer an option for new businesses since the last Companies Act.

How do I reserve a company name in South Africa?

Under the Companies Act 2008, a company can be registered with or without a company name. When a company is registered without a reserved name, its registration number automatically becomes the company name. If a name is to be chosen, an application must be made to CIPRO (Company and Intellectual Registration Office) to reserve the name and then register the company. A list of four names will be requested in case the first one chosen is already taken. The procedure can be done online at the CIPC website, and the reservation of a name costs R50.

Procedures for registering a company in South Africa

BizPortal is a platform developed by the CIPC to enable online company registration and related services. BizPortal is currently only available to South African ID card holders.

If you are not a South African ID card holder, you must go to the CPTC website.

The documents required for a Pty Ltd company are the postal and corporate address, the memorandum and articles of association, the address and identity papers of all directors. Various forms must also be completed. The registration of a company costs 125 Rands.

The CIPC and the SARS (South African Revenue Service) communicate electronically. After registration with the CPTC, the company must be registered with the SARS, and the EMP101e form must be completed. This form will be used to register the company for employee tax (PAYE) in South Africa, unemployment insurance (UIF) and training tax (SDL). Companies with a turnover of more than R$1 million are subject to VAT.