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Thread: From freelance to business ??

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    From freelance to business ??

    Im just curious. I am running a freelance "Design Agency" we are doing well. Its come to a point now where i get phonecalls from designers looking for employment and other agencies trying for partnerships. Obviously online im Playing business. I want to know when and where is the point within our laws in south africa that you have to register as a business , and pay your taxes, do proper book keeping ect ect.

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    Well, my accountant told me this:

    - You can stay as sole proprietor (in other words, your business is just you as a person offering a service, and not registered as a company) forever if you want, this doesn't need any registration, but at some point you are going to have tax disadvantages. But for a beginning businesss without serious debt, there is no reason to register. If you have debts, registration will help to prevent the bank confiscating your house if the business goes under, but it won't necessarily protect you.

    - You have to register for VAT once you hit R1 million turnover, regardless of whether you are a 'registered' business or not. However, a company only has to register for VAT at R2 million, so the main reason to start a company is to avoid the VAT hit. It becomes a tax advantage to register your business at that point, but not it's not a legal requirement. You can remain as an unregistered business, if you don't mind paying VAT.

    - Bear in mind that once your business is a company, then you might have to pay yourself a salary from the business, meaning you have to then pay a double tax - a tax on the business profits, and PAYE on your salary! A good accountant will be able to work out if it's worth it.

    - Technically you should always do proper bookkeeping, but it's only really required if you cross the tax threshold. If your business, registered or not, crossed the minimum amount of money earned that is required to pay tax (I think it's R77 000 for 2017) then you have to start sorting out your tax, and unfortunately as a business that means slugging it through provisional tax, which either means you have to be really good at bookkeeping or have an accountant sort it out (unless you opt for turnover tax). Technically you should sort out your tax obligations even if you don't cross the tax threshold, but in practice SARS has decided not to waste money harassing small businesses that don't even earn enough to pay tax, so you should be able to escape.

    - There are other issues involving tax, like your accountant can switch you to small business tax for example if you fulfil all the requirements, that puts your business in a lower tax bracket, but these are issues to discuss with your accountant once you are in a high enough tax bracket to worry about such things.

    - If you're not willing to spend money on an accountant/bookkeeper, then you can instead switch to turnover tax, which is a super simple tax that you work out based on how much money went into your bank account. Unfortunately, you can't offset losses (because you are taxed on turnover, not on profit!) meaning you are liable for tax even if your business is losing money (whereas with provisional tax, although you are spending money on an accountant, you don't pay tax if your business is making a loss)

    If you're still earning a salary, bear in mind that the money from your freelance work may end up being added to your total income and you may find yourself liable for a lot more tax than you expected! In practice, I believe SARS does allow you to side-hustle a small amount of money on the side tax free, but a few years ago when I did so I still had to pay SARS a tax on the amount I earned and then SARS refunded me the exact amount a few days later, it was a bit silly but it shows how serious SARS is about your tax obligations.


    I'm grateful to work with an accounting team that is willing to sit with me and explain everything in simple terms, they've taught me a lot. I even had a long introductory discussion with them before I even signed on (where they explained a the very questions you asked - because I was also asking them!), and so far they are worth the expense considering all the education they are giving me on the way.

    Anyway, I am NOT an accountant so please double check all my advice with someone who is 100% clued up on these issues.

    Another advantage of registering a business is that if someone sues you, they sue the business and not you in your personal capacity. This doesn't protect you 100% but it can offer some protection, hopefully they won't be able to take your house from you but will stick to grabbing what they can from the business assets. It depends on the risk profile of your industry, though. I doubt that in designing you have a huge risk of being sued for millions of Rand.

    But I am NOT a lawyer, so you'd have to discuss this specific issue with a lawyer if you feel you need that extra layer of protection due to your business activities.

    I hope that helps!

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    Hi Thomas , i dont really have any response to this as your post answers what i had been looking for and then some. I just wanted to thank you for this exceptional post in explaining this to me in such a easy to understand manner.

    Regards
    Juan

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    Dr Thomas (21-Dec-17)

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    Amazing feedback!

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