So, you want to be an entrepreneur during Covid-19 – Some legal and practical tips to get you started
16 Feb 2021
2020 has been the kind of year where you have had to take the lemons that have been forcefully given to you and make lemonade – literally sink or swim situation. Pivot from bad to good (as people have been saying). And with that overwhelming sense of disappointment and panic, some people have been left with a sense of – what do I do now?
Well, for a lot of people, they have taken the proverbial bull by the horns and have started their own gig – they have become entrepreneurs. And that can be an extremely exciting (but also terrifying) experience. And it takes guts.
After all, there are so many intricacies and believe you me, you want to get it right. The first time round. When it is your own thing, when it belongs to you, ensuring you take all the necessary (and required steps) is crucial. It is your name on the door after all.
So, where to start?
That’s a good question. Here are some of the high level points.
Of course, any business starts with an idea. What will your business be – will you be providing something? Making something? Advising? But, first things first – always start with an idea. And build from that.
Then think of a name – which of course needs to be unique (you will need to do a name search to ensure it is something you can use. But we will discuss this below). Your name needs to help describe who you are and what you do, whilst at the same time enabling you to stand out from the crowd. And that can be a tall order. But a name can also give you direction. And when starting out, that’s exactly what you need…
Then comes – how you will start your business. Will you need funding? This can be a complicated one. What is your financial position? We discuss this briefly below.
And while funding is a crucial aspect for any budding entrepreneur, the understanding of all the compliance and legal requirements of starting up your small business is as important (if not more so, in certain instances).
Falling behind or not complying with legal and statutory regulation can quickly sink a business, so it is always best to keep in mind getting the legalities right from day one – from the CIPC registration, to the Department of Labour, SARS registration and COIDA (and that is not even taking into account the wide array of industry-specific organisations such as the NHBRC, if applicable). Making a mountain out of a molehill definitely comes to mind….
But deep breaths – we got you!
Here are some of the key legal aspects you will need to be aware of as an entrepreneur (especially when first starting out)….
Firstly, let’s talk Rand’s and cents – if you are looking for capital, what sort of finance should you apply for?
The answer to this depends on the financial position of your company. For example, you might consider debt finance, which is cheaper, but more perilous. Taking on more debt increases the debt-to-equity ratio of your company. Which often results in startup businesses struggling to receive future debt finance if they are already highly leveraged. Also, consideration must be given to the fact that risk stays with the business to repay the loan (or bond) should the business fail.
Equity finance (meaning cash from investors in exchange for shares) is another choice and does come with its advantages – like the investors taking on all the risk. Before making any decisions, we urge you to speak to your own financial service provider who will be able to best advise you on your particular financial circumstances. Do not take these decisions lightly. Or unadvised.
What type of business should you register?
The type of business you choose will depend on the structure of your business. In South Africa, we have a few options –
- Sole Proprietor – a simple structure (also referred to as a sole trader) which is suitable when there is only one person in your business i.e. trading as yourself;
- Partnership – this is where you are operating the business between two and twenty partners, each contributing (either financially, via their Intellectual Property or otherwise) to the business. The terms of the partnership can however be agreed to between the partners;
- Proprietary limited Company (or Pty LTD) – where a legal entity is created with a separate liability from the owner/s. This is a popular option because the debts of a company generally belong to the company, and the owners are not at risk of losing their personal assets should the company run into financial trouble. Good to know – even if you launch your business single-handedly, this type of business is still registered as a separate legal entity;
- Public Company – needs to be registered with the CIPC. A public company is a business that issues securities through an initial public offering (IPO) and trades its stock on at least one stock exchange. The daily trading of the public company’s stock determines the value of the whole business. It is a public company because its shareholders can be anyone who purchases stock.
Legal advice should always be sought before you elect the type of entity you register as each one has its own pros and cons and different legal requirements.
Once you have decided on the structure of your business, let’s get down to the nitty gritty of how you start your business the right way –
Registering your business
No matter what the size of your business is or the amount of profit your business makes (or will make in the future), registering it can offer numerous legal benefits, such as asset protection and the ability to raise equity capital. It will also simplify admin processes in the future.
Talk to us if you are unsure about registering your business or whether you have any other concerns about your startup – we are here to help you!
But, all businesses will need to be registered with The Companies and Intellectual Property Commission (CIPC). The CIPC is an agency of the Department of Trade and Industry in South Africa that assists with the registration of companies and intellectual property rights (trademarks, patents, designs and copyright).
You can register your business yourself, but it is always best to get the assistance of professionals, such as those at Benaters, who can assist you with the process of formation, structuring and registering of your business – sort of like a one stop shop.
So, what are the actual steps when registering a business?
1. Start by reserving a name for your business –
In terms of Section 11 of the Companies Act 71 of 2008, a company may be registered with or without a company name. But, when a company is registered without a reserved name, its registration number automatically becomes the company name. This is the quickest way to register a company but is not always ideal – you will have to amend the name of the existing company at a later stage, which will involve first reserving a company name, then applying to the CIPC to change the existing name together with paying the prescribed fee. All of which takes time that could be better spent actually doing business. This name change will also constitute a change to your company’s Memorandum of Incorporation (MOI). So keep in this in mind.
If you do decide to register an actual company name, first carry out a name search with the CIPC to ensure that no other company bears the same trademark or name as you .The CIPC does not charge business owners to search patented information as long as they have registered on the main portal to access the CIPC online services (so ensure to register on the CIPC website). Once you get an “ok” regarding your desired company name, reserve the name and initiate the company incorporation process (as below).
The CIPC charges R75 for the manual registration of the company’s name and R50 if you file electronically on the portal. From the date of application, it will take three days to reserve the name until its approval. Once approved, the name reservation will be valid for six months.
Registering your business with the CIPC
To register your company with the CIPC you will need to file the following documentation –
a) copies of a Notice of Incorporation and Memorandum of Incorporation (a document that sets out the rights, duties and responsibilities of shareholders, directors and other persons involved in a company. Every company registered in South Africa needs to have a MOI) – one can download both a Notice of Incorporation and the CIPC prescribed, standard form CoR15.1a.MOI on the CIPC’s website. However, in our humble opinion, the default form offered by the CIPC is not ideal. We therefore advise that your MOI be carefully drafted by a legal professional in order to not only comply with the law but to also ensure that the MOI is drafted in a way that best suits your businesses needs long term;
b) identification documents (ID) or passports of the incorporators and the directors or identification copy of the applicant if none of the directors are making the registration application;
c) a power of attorney to sign all the related documents on behalf of the incorporator if he/she is a juristic person;
d) a certified ID copy to identify the power of an attorney, and
e) a valid name reservation in case of a prior filing of incorporation.
Note – it will take almost 25 days to have fully registered company in South Africa from the date of application.
2. Open up a business bank account –
This is a SARS requirement (and is therefore compulsory). A company bank account will need to be opened. One benefit is that it ensures separation of business and personal transactions for “clean” bookkeeping.
3. Register with SARS –
As soon as you start a business, whether you’re running a sole proprietorship, a partnership, private or public company, you have to be registered with the South African Revenue Services (SARS) and obtain an income tax reference number. It’s mandatory to register within 60 days of starting a business by completing an IT77 form, either at any SARS office or even online. If you have registered a company with the CIPC, you will automatically be registered as a taxpayer with SARS. Sole proprietors or partnerships need to register as provisional tax payers directly, and this can be done at any SARS office.
4. Attend to employee registrations –
If you’re going to be employing full time staff, these are the basic tax and legal requirements to remember:
Register for Pay as you Earn (PAYE) Tax
If you employ one or more staff members you will be required to pay to SARS PAYE tax which has different tax rates for employees who are paid weekly, fortnightly or monthly. The PAYE tax is calculated based on the employee’s earnings and includes basic salaries, bonuses, fringe benefits and other allowances. When calculating PAYE, earnings get multiplied by 52 weeks, 26 weeks or 12 months (depending on how often an employee gets paid) to get an annual amount, before being applied to the SARS tax tables to calculate annual tax. This is then divided again by the same work period to get the monthly PAYE tax which is then withheld, displayed on the IRP5 and paid over to SARS. However, a good rule of thumb to remember is that the PAYE tax is required for any and all staff members earning over R40 000 annually.
Register with the Department Of Labour
All companies – and sole proprietorships that have one or more full-time employees need to register with the Department of Labour. This is mandatory in terms of the Compensation for Occupational Injuries and Diseases Act (COIDA).
COIDA replaced the previous Workmen’s Compensation Act in 1993, and provides for compensation for 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.
Employers are required to submit a Return of Earnings form (W.As.8) on an annual basis. The benefit of COIDA is that it protects employers from personal liability in instances of occupational injuries or diseases sustained or contracted by employees in the course of their employment. An employer must register with the CIPC (by submitting Form W As 2) within seven days after the day on which the first employee is employed. These forms are available on the website of the Department of Labour.
Register with the Unemployment Insurance Fund (UIF)
All employers must register their employees for unemployment insurance, which can be done on Form UF8 at any SARS office, or online. They should also obtain copies of Form UI-19, which is required to register new employees when they join the company. UIF benefits covers staff when they are on maternity leave or off work due to prolonged illness (which can be done for free via uFiling).
If annual payroll exceeds R500 000, you will also have to register for payment of the Skills Development Levy (SDL). In order to do this, simply complete an EMP101 Form at any SARS office. This includes sections for contributions to the Unemployment Insurance Fund (UIF) and payment of the SDL.
UIF payments must be made monthly, either directly to the UIF or together with PAYE and the Skills Development Levy (if applicable).
5. Register for VAT –
It isn’t necessary to register for VAT right away.
Rule of thumb – VAT registration is voluntary if income for a 12-month period exceeds (or is estimated to exceed) R50,000. However, VAT registration is compulsory if income for a 12-month period exceeds (or is estimated to exceed) R1 million.
Protecting your Intellectual Property (IP)
Trademarks, Patents, Designs and Copyright form part of your company’s IP. These are administered by the CIPC. IP can be quite broad spanning any of your original ideas, inventions or artistic creations, so it’s best to discuss this with legal professionals, such as those at Benaters, as part of your registration process.
What about the local council?
There may be municipal by-laws in the area where your business operates affecting how your business will be run. Regulation differs depending on the type of business you’re starting. For example there may be noise, hygiene, operational or trading related legal considerations that are important to be aware of during the planning stages of your business. Especially if you are located in or around residential areas.
In uncertain economic times like the ones faced in 2020, startup are becoming more and more common place. And the paperwork can be overwhelming. Especially for newbies. But it is important to focus all your energy on your day-to-day business and manage any unexpected changes that may arise.
And we know that it seems like A LOT of admin (which is kind of true). But rest assured, once you know the in’s and out’s and what you need to do, it’s fairly straightforward to manage. And we can help.
Whatever business you are looking to start, you have no reason to hold off on your aspirations. Get in touch with us today so that we can guide you on the points above and steer you towards achieving your goals – which are definitely achievable. We are so excited for your new endeavor and will support you every step of the way – Go for it!
This article is intended for general informational purposes only and does not address individual circumstances. It is not a substitute for professional advice or help and should not be relied on to make decisions of any kind. Contact Benaters for personalized, professional legal advice that you can rely on.
Article sourced from Benaters.
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