An entrepreneur who wants to keep things simple and hit the ground running will often become a sole proprietor (sole prop). This is because sole proprietorship is not a legal entity, so you don’t need to register your business with the Companies and Intellectual Property Commission (CIPC). And because you don’t have to register as a sole proprietor, you simply become one as soon as you open your ‘doors’, whether you are selling food at a stall or providing freelance services such as photography or design.
However, the entrepreneurial world is a challenging one – whether you are a sole prop or private company, or whichever you choose as your business entity. As such, to set yourself up for success, there are key considerations you need to address at the start of your journey.
Mmasetena Nyatlo, Product Head for SME Banking at TymeBank, provides a checklist of must-do’s when starting your own business or side hustle.
Know What to Sign Up For
Even though a sole proprietorship doesn’t need to register with the CIPC, there is still some paperwork you need to get in order.
As a sole proprietorship you are personally liable for any tax payable to the South African Revenue Service (SARS), and you carry the full business risk in your own name. Given that, there are a few items you should register for before you open your shop:
- When it comes to taxes, as a sole prop you will need to file a tax return for your combined personal and business revenue per annum through a ITR12 (a tax return for individuals). You also need to be registered for provisional tax since you are generating income that is not a salary. This means you need to complete and file an IRP6 form. Even if you are employed and just have a side-hustle, you still need to register for provisional tax.
- To safeguard your venture, understanding your risk factors and researching the right insurance products for you, such as legal liability coverage, will be smart. And if you have a brick-and-mortar business protection against natural calamities, theft, and fire is important.
Bank on Yourself
Most sole props use their personal accounts for their business venture as it’s convenient and often don’t want to go through the hassle of managing another separate business account. However, using a normal personal account can blur the lines between revenue vs. personal income, as well as business vs. personal costs.
Fortunately, a number of innovative business accounts are available that provide access to your business and personal banking in one place. It’s also wise to find a bank that has no monthly fees and offers instant payments to employees and/or suppliers and provides access to exclusive business communities with powerful tools to help grow your business.
Further, by having trackable business transactions on your account, you boost your chances of pre-qualifying for funding when you need it.
Understand your Taxes
VAT-wise, initially you may not need to register for VAT at all, but this will change if the total value of your taxable goods or services exceeds R1 million in a 12-month period.
You are liable for VAT if you surpass the R1-million revenue ceiling over the course of a year. Remember that besides adding 15% to all your invoices, you also need to submit a VAT return to SARS every two months, depending on the nature of your business. It’s important to be disciplined about providing this information to them. To assist you, it’s a good idea is to set aside 30% of your income in a separate savings product and keep it there until your provisional tax is due. Not only have you ring-fenced the money, meaning you won’t be tempted to use it, but you will also earn interest.
Note: SARS may decide to audit you. This is based on a random selection and, if chosen, you will be required to declare all your income and expenses. So, keep records of all your business expenses and income, including invoices, so that you can always distinguish between personal and business expenses (having a separate business account will really help with this).
Have Cash Reserves
Starting a new business or sole proprietorship is very rewarding but there will invariably be some expensive lessons until you are on your feet. Have enough cash on hand and be ready for the fact that you may not break even for a few months or more.
Having a financial runway to get you through the first 1000 days (the amount of time it is believed that a SME must surpass to make their business work in the future) is a must. It’s important to have enough cash savings on hand to carry you through the initial period until you start bringing in revenue; it’s equally important to know exactly what your costs are and to ensure your pricing covers these so that you don’t run at a loss. First prize is to make a profit from the start, but it may take a while before you get there.
It takes grit, money and time, often a lot of time, to get a new venture going, but once you see the revenue coming in, it will all be worth it.
