Sole Proprietor or Company: What's Best for Tax?



Getting a new business venture off the ground is an equally exciting and stressful time. You’re enthusiastic about getting your new product or service out into the market, but you face quite an administrative process to get it off the ground legally.

A decision that often stumps many small business owners is whether to operate as a sole proprietor or as private company, a PTY Ltd. We receive many questions about this from entrepreneurs wanting to know the tax implications of each route. 

So let’s first have a look at an overall comparison of the two entities.

Key Differences Between a Sole Proprietor and PTY Ltd

 Legal Entity

Sole Proprietor
Owner and business are the same legal enity 

PTY Ltd / Company
Company is a separate legal entitiy 

The Number of Owners 

Has one owner (that will be you)

May have one or more owners 

Start-up capital 

Small start-up capital 

High start-up capital (Must be registered etc.) 

Controlling Body 

The owner has full control over the busness. 

All the directors have shared control over the business. 

Rules & Regulations 

Basic 

Complex

Liability

The sole proprietor is personally liable for all the business’s debts.

Shareholders have limited liability meaning that should the company become insolvent, creditors can’t claim from the shareholders in their personal capacity.

Business Registration

No legal requirement to register business.

Company needs to be registered with CIPC (Companies and Intellectual Property Commission).

Annual returns need to be filed with CIPC together with annual fee for continued registration.

Income Tax Implications 

The owner is personally responsible for all business and personal taxes. The business income and expenses will declared on the owner’s personal tax returns.

Business income and expenses will be declared on the Company’s tax return.

Income Tax Registration

The owner must be registered as an individual taxpayer & as a provisional taxpayer. Therefore, there will be 3 tax returns due per tax year on which tax may be payable. This includes the 2 Provisional tax returns during the tax year (estimate figures) and the final annual tax return after the tax period (final figures).

The Company must be registered with SARS as an income taxpayer (the company is normally automatically registered for income tax when the company is registered) & as a provisional taxpayer. Therefore, there will be 3 tax returns due per tax year on which tax may be payable. This includes the 2 Provisional tax returns during the tax year (estimate figures) and the final annual tax return after the tax period (final figures).

Tax Rate

Owner is taxed on the profits at the applicable personal income tax rate.

Company profits are taxed at flat rate of 28% (unless the company qualifies as a SBC or Micro Business registered for Turnover Tax).

Tax Returns

Business profits are included in the owner’s individual tax return (ITR12) under the “Local Business, Trade and Professional Income” section.

Company needs to file a Company Tax Return (ITR14) in its own capacity. 

Dividends Tax

Not subject to dividends tax.

Dividends tax is paid by the company and levied at 20% on distributions to shareholders.

Financial Statements

Not required.

Financial statements need to be compiled by an Accounting Officer and submitted to SARS when ITR14 is filed.

PAYE

Sole proprietor’s drawings not subject to PAYE.

Must be registered for PAYE if there are employees.

Company must register as an “employer” with SARS and a director’s salary is subject to PAYE deductions.

VAT Registration

Requirement to register for VAT when turnover for a twelve-month period is R1m or more.

Requirement to register for VAT when turnover for a twelve-month period is R1m or more.

As you can see from the above, the sole proprietor route is less administrative-intensive to start, but you do take on much more personal risk than that of a company director. But let’s hone in on the tax element, shall we? After all, you’d want to select the best way to structure your business in order to be the most tax efficient, wouldn’t you?

How Do I Run My Business in The Most Tax Efficient Way?

The answer boils down to the level of earnings you expect from your business.

Individuals are taxed on a sliding scale, which means that the rate of tax you pay increases as your earnings increase. This is called a progressive rate of tax and applies to any individuals earning more than R83,100 per tax year 2021.

As an individual, you benefit from the general tax rebate, which brings down the amount of tax you owe by a flat amount, depending on your age. If you’re under 65 years, this is called the primary rebate. There’s a secondary rebate for those over 65 years and a tertiary rebate for those over 75 years.

In a company, profits are taxed at a rate of 28%, irrespective of value. In addition, dividends tax is levied at 20% on profits retained in the company and distributed as a dividend in the future.

Let’s do a worked example of the difference this makes on R100,000 profit between a registered company and a sole proprietor’s tax position.

We’ll assume that ABC PTY Ltd didn’t pay out any profit in the year, and distributes a dividend the following year.

PTY Ltd / Company
Company is a separate legal entitiy 

                                  

2020

2021

ABC PTY Ltd annual taxable income                                         

R100,000

R100,000

Company tax at 28%                                       

(R28,000)

(R28,000)

Net profit                                        

R72,000

R72,000

Dividends tax at 20% (20% x R72,000)

R14,400

R14,400

Effective rate of tax (R28,000+R14,400) / R100,000                                      

42.4%

42.4%

Now, let’s look at the same situation for Lerato, a sole proprietor.

                                  

2020

2021

Lerato’s annual taxable income                                     

R100,000

R100,000

Individual tax at 18% (SARS table for R100,000 per annum)                                   

R18,000

R18,000

Less Primary rebate                             

(R14,220)

(R14,958)

Total tax 
2020: (R18,000 – R14,220)
2021: (R18,000 - R14,958)

R3,780

R3,042

Effective tax rate 
2020: (R3,780 / R100,000)
2021: (R3,042 / R100,000)                                     

3.78%

3.04%

While we showed the full worked example above, you can take a short cut by using TaxTim’s Income Tax calculator!

In our example above, Lerato’s effective tax rate of 3.78% (2021: 3.04%) is significantly lower than ABC PTY Ltd’s at 42.4%. What we must remember though is that as Lerato’s business grows and becomes more profitable, she’ll move into higher tax bracket, increasing her effective rate of tax.

Let’s do another example, but this time where the taxable income is R1,000,000 for the tax year. How does the tax situation change for Lerato?

Our company this time, XYZ PTY Ltd, has a sole Director, Billy, who draws an annual salary of R360,000 (or R30,000 per month). This amount is deducted before corporate tax is applied.

                                  

2020

2021

XYZ PTY Ltd income before Director’s salary                                       

R1,000,000

R1,000,000

Director’s salary                                  

(R360,000)

(R360,000)

XYZ PTY Ltd’s annual taxable income                             

R640,000

R640,000

Less corporate tax of 28%

(R179,200)

(R179,200)

Retained earnings                                     

R460,800

R460,800

Dividend Tax on future pay out at 20%                                 

R92,160

R92,160

As Billy is drawing a salary of R360,000, he’ll be liable for individual tax on this amount.

                                  

2020

2021

Tax on salary as per TaxTim’s Income Tax Calculator                                

R66,419.50

R64,090.00

Therefore, the total tax paid:

                                  

2020

2021

XYZ PTY Ltd corporate and dividends tax (R179,200 + R92,160)                                      

R66,419.50

R64,090.00

Billy’s individual tax                                  

42.4%

42.4%

Total tax                             

R337,779.50

R64,090.00

Now let’s have a look at Lerato’s tax for an income of R1,000,000 for the year. This amount puts Lerato into the 41% tax bracket, as per SARS tax tables for individuals.

                                  

2020

2021

Total tax as per TaxTim’s Income Tax Calculator                            

R312,821.90

R307,813.00

As there are numerous other deductions and allowances to consider for both an individual and a company, we’d have to perform detailed calculations for both scenarios to determine which is truly more tax efficient.


Lerato is paying R24,957.60 (i.e. R337,779.50 -R312,821.90) (2021: R27,637.00) less tax in her own capacity than if she was operating through a company and drawing a salary of R30,000 per month.

What is evident though, is that as an individual earns more and moves into the highest tax bracket, the difference in tax between a company and a sole proprietor decreases. At lower levels of taxable income, it’s far more tax efficient to operate as a sole proprietor and enjoy the benefits of sliding tax tables and rebates available to individuals. At higher income brackets, it’s likely that company registration would be more beneficial.



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