If you’ve registered a company (Pty Ltd) in South Africa, you could be eligible to register your company as a SARS small business corporation, which would mean that you pay less tax. For this reason, Small Business Corporations (SBCs) are a popular choice for entrepreneurs and small business owners in South Africa.
SBCs are also eligible for a range of other benefits, such as access to funding and government support programs. These programs are designed to help small businesses overcome common challenges and grow their operations. Additionally, SBCs have greater flexibility and autonomy than other types of businesses, which allows them to respond more quickly to changes in their industry and market conditions.
The aim of SBCs is to provide support and stimulate growth for small businesses in the country. SARS has therefore implemented some rules on turnover, asset value and industries that are eligible, which will be discussed below.
Requirements for Small Business Corporation (SBC) Registration in South Africa
To register as a Small Business Corporation (SBC) in South Africa, you must meet specific criteria. The first requirement is that your business must be a resident of South Africa. This means that your business must be registered and operating in South Africa, with its primary place of business in the country.
To qualify as an SBC in South Africa, a business must meet the following requirements:
- Turnover: The business must have an annual turnover of less than R20 million.
- Shareholders: The business must have no more than 20 shareholders, all of whom must be natural persons (i.e. individuals).
- Ownership: The shares in the business must be held by South African residents.
- Primary business: The business must derive at least 50% of its income from trade.
- It must not be an investment company where most of its income is derived from investments such as rental property and dividends.
- Professional services are excluded from registering as an SBC unless they employ more than three employees
Taxation for Small Business Corporations (SBCs) in South Africa: What You Need to Know
One of the main benefits of being an SBC is the reduced tax rate. SBCs pay tax on a sliding scale, with a maximum rate of 27%. This is significantly lower than the standard corporate tax rate of 27%, which applies to businesses that do not qualify as SBCs. The tax rates for SBCs are as follows:
- Annual turnover of R0 – R83,100: 0%
- Annual turnover of R83,101 – R365,000: 7%
- Annual turnover of R365,001 – R550,000: R18,250 + 21% of taxable income above R365,000
- Annual turnover of R550,001 – R750,000: R58,250 + 24% of taxable income above R550,000
- Annual turnover of R750,001 and above: R93,250 + 28% of taxable income above R750,000
SBCs are also exempt from certain taxes, such as a secondary tax on companies (STC) and dividends tax.
Excluded Businesses: Which Types Don’t Qualify as SBCs in South Africa
While SBCs offer many benefits, not all businesses are eligible to register as an SBC in South Africa. In general, businesses that fall outside the definition of a “small business corporation” according to the Income Tax Act will not qualify. This includes businesses that generate too much revenue or have too many employees. Additionally, certain types of businesses and industries are specifically excluded from SBC status.
Examples of Excluded Businesses and Industries for SBCs in South Africa
As mentioned, professional services and some other businesses are excluded from registering as SBCs. There are, however, some workarounds. SARS is trying to prevent a self-employed professional to get the tax benefit, if he is employed by his own company. Therefore, if he hires three employees, SARS will see it as eligible to register as an SBC, rather than an extension of their personal empire.
Here are some examples of businesses and industries that are excluded from SBCs:
- Professional service firms, such as lawyers, architects, and accountants (and software developers like me)
- Investment companies and groups
- Property developers and investment property holding companies – this means you’ll need to register your property company as a standard Pty Ltd
- Mining and exploration companies
- Foreign businesses and branches – this is a South African thing
- Franchisees with multiple franchise locations – these types of companies are moving away from small businesses
- Non-profit organizations and charities – there are better options for these 😉
It’s important to note that this list is not exhaustive, and there may be other types of businesses that are excluded from SBC status. Before registering as an SBC, it’s important to ensure that your business meets all of the requirements and is not excluded based on its industry or type of business.
In conclusion, registering your business as an SBC can have many benefits, including tax savings, legal protection, and access to funding and resources. However, it’s important to carefully consider whether this structure is the right fit for your business based on your specific goals and circumstances.
Consulting with a legal or financial professional can help you make an informed decision and ensure that your business is set up for long-term success. Whether you choose to register as an SBC or pursue another structure, remember to regularly evaluate and adjust your business strategy to stay competitive and meet the changing needs of your customers and industry.