6 Factors Start-Ups Should Consider
22 September 2016
Posted by: Author: Candice Mullins
Author: Candice Mullins (The Tax House)
Starting a company involves climbing a bureaucratic mountain. We look at six issues entrepreneurs need to consider.
1. Registering a company
After reserving a name with the Registrar of Companies, the founding documents must be registered with the Companies and Intellectual Property Commission (“CIPC”). The directors are required to open a bank account and, in order to facilitate any registration, FICA requires the company to validate its business address. A utility account or a signed rental agreement is often used in this regard.
The Companies Act (Act 71 of 2008) provides for six types of companies namely: a private company; a public company, a state-owned company; an external company, a non-profit company and a personal liability company. The emphasis, for purposes of this discussion, will be on private companies.
Since the implementation of the new Companies Act 71 of 2008, no Close Corporation (CC) can be registered and no conversions of Companies into Close Corporations are granted. Existing CC’s will be maintained. There is a proposal to phase out CCs, but no specific timelines for this have been given. CCs must comply with the Close Corporations Act 68 of 1984 (“CC Act”) while the Companies Act 81 of 2008 governs Companies.
For tax purposes, a CC and Company are treated in the same manner but there are some significant differences between a CC and a Company. The most important of these differences is that a Company’s shareholders can restrict powers of directors and even remove directors whereas a member of a CC has absolute power with respect to all aspects of the business, including operational functions.
A private company places no restrictions on the number of shareholders it subscribes. A CC, on the other hand, is limited to 10 members. This significantly restricts the ability to raise capital. Any legal persona is entitled to own shares in a company, but a CC membership is limited to natural persons, inter-vivos and testamentary trusts.
The CC Act does not require a mandatory statutory audit for a CC whereas; it is the Public Interest Score that will determine whether a Company must undergo an audit, independent review or simply a compilation of its annual financial statements.
The voting rights of shareholders of a Company must be determined by the Memorandum of Incorporation. This document also governs the rights and obligations of directors and takes precedence over the Shareholder agreement.
An Association Agreement, in terms of section 44 of the CC Act governs the internal relationship between the members or between the members and the corporation.
2. The registrations you need to complete
Taxation and other compulsory registrations are required for any start-up company, however, there may be some additional registrations required depending on the industry that the company operates in. These would include, among others, registrations with the Financial Services Board, the Estate Agency Affairs Board, The Law Society, International Air Transport Association, Import and Export licenses.
The vanilla type registrations are:
1. Income Tax and Provisional Tax
2. Value Added Tax (VAT)
3. Pay-As-You-Earn (PAYE)
4. Unemployment Insurance (UIF)
5. Skills Development Levy (SDL), and
6. Workers compensation
The obvious registration is for Income Tax. All South African corporates must register for income tax and provisional tax except for approved public benefit organisations that are exempt under section 10(1)(cN), who do not have to be provisional taxpayers.
It does seem to be practice of CIPC to register newly registered companies for income tax directly with SARS but this is not always the case.
VAT registration is only required on a mandatory basis, if your business generates taxable supplies of more than R1 million in any 12 month period. Voluntary registration is allowed where taxable supplies exceed R50 000 for a 12 month period. These thresholds include zero-rated supplies but exclude exempt supplies.
A commercial accommodation operation, can no longer be registered for VAT if their taxable supply is less than R120 000 for any 12 month period. Commercial accommodation includes: hotel, guesthouse, holiday accommodation unit, caravan park, establishment for the aged etc. The threshold was R60 000 prior to 1 April 2016.
Every employer who pays remuneration, which is subject to employees' tax, has to register with SARS as an employer. PAYE will be declared monthly on an EMP201 form, which is submitted and paid to SARS no later than 7th of each month following the remuneration month.
Employers must also register for UIF where any employee works more than 24 hours a month. Learners, public servants, foreigners working on contract or commission only earners are also excluded from paying UIF.
Where an employer expects that the total salaries of the company will be more than R500 000 over the next 12 months, that employer becomes liable to pay Skills Development Levy (SDL).
Lastly a business needs to register with the commissioner in accordance with the Compensation for Occupational Injuries and Diseases Act. The purpose of Workmen’s Compensation is to provide for compensation disablement caused by occupational injuries or diseases sustained or contracted by employees in the course of their employment, or for death resulting from such injuries or diseases. It also provides for the families of the insured in certain circumstances.
3. Managing company residency
The next element to consider is the tax “residency” of a company. A company is resident in South Africa if it is incorporated, established, or formed in South Africa or has its place of effective management in South Africa. However, a company that is deemed to be exclusively resident in another country in terms of a double taxation agreement (“DTA”) is excluded from South African residency.
Draft Interpretation 6 issued by SARS, describes effective management as the place where key management and commercial decisions that are necessary for the conduct of its business as a whole are, in substance, made. This approach is consistent with internationally accepted principles.
4. Advantages offered to small businesses
Many small to medium sized businesses have enjoyed the special dispensation for qualifying small business corporations. By meeting this definition, the corporation is entitled to favourable tax tables, and accelerated capital allowances. The limitation excludes corporations that earn more than 20 per cent of their revenue receipts from passive income. It also excludes personal service corporations who employ less than three full-time employees who are not connected persons in relation to those that have in interest in the entity.
5. Asset for share start-ups
A start-up company may have originated due to a Section 42 Asset for Share transaction. No immediate income tax, capital gains tax, value-added tax or securities transfer tax will apply in this instance for the disposer of the asset(s).
The base cost of the asset “rolls over” to the Company and the deferred capital gain on the asset is only triggered when the Company disposes of the asset.
The legislation requires that after the transaction, the person disposing of the asset and acquiring the shares, must either:
- Hold 10 per cent or more of the equity share capital; or
- Be a natural person who is engaged on a full-time basis in the business of that company in the form of rendering a service (The draft 2016 Tax Law Amendment Bill (“2016 Draft TLAB”) proposes to more clearly define this to a personal liability company).
An anti-avoidance provision exists. Where a person disposes of any share received in terms of an asset-for-share transaction within 18 months after the date of acquisition, and immediately prior to such disposal, more than 50 per cent of the market value of all the assets disposed of by that person to the company is attributable to allowance assets or trading stock, that person will include the disposal of shares in that his/her/its income (Section 42(5) of the Act).
6. Venture capital companies
It seems that SARS registered Venture Capital Companies (VCC) are not as popular as was intentioned. Presently, SARS’ website only displays 36 registered VCC companies. The purpose of the VCC tax incentive is to provide equity finance for small to medium sized businesses and junior mining exploration companies. If the investor stays invested for a minimum period of five years, he will receive a full tax deduction against taxable income. If not, it is fully recouped. It should be noted that the VCC must be licensed as an FSP with the Financial Services Board. The investor cannot be a connected person to the VCC and must therefore hold less than 20 per cent of the company (The Draft TLAB 2016 is suggesting that this requirement should only be after 36 months).
Some critics have suggested that the VCC regime is “fiscally unstable” and does not consider normal economic policies which has frightened off possible investment. SARS is also able to withdraw the approved VCC status for non-compliance which could lead to the VCC having to include in its income, an amount equivalent to 125 per cent of the expenditure incurred by investors to acquire the VCC in the year of non-compliance.
There are many more considerations which have not been covered in this article that may be relevant such as the Employment Incentive Scheme, Headquarter Companies, PBO registrations and Micro-Businesses. South African entrepreneurs drown in hefty amounts of legislation and, although well meaning, they puts enormous pressure on directors to get it right.
This article does not have the scope to cover all of these aspects. The entrepreneur or investor should seek the appropriate advice from experts who can confidently advise as to what registrations and legislation would be relevant for their type of industry or business.
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This article first appeared on the September/October 2016 edition on Tax Talk.