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Chapter 13 - Small Business Law
PROBLEM 1: What type of business to start
Connie, Elizabeth, Phumlani and Themba want advice on how to start their businesses.
Connie has two sewing machines. She wants to start sewing clothes for people in the community and perhaps some uniforms for a hotel in town. She will employ one person and work from her home. She will ask her clients for a deposit and buy material with the deposit. She wants to know how to register the business and what kind of business it should be.
Elizabeth, Phumlani and Themba want to start a business making furniture. They have borrowed money from the bank to buy materials to start. They will work from a shed which they will rent from a farmer. They want to know what type of business they must have.
What can you tell them?
Connie's business will not be very big and she does not have the money to start a company. Advise Connie to be a sole trader and explain as follows:
- What a sole trader or sole proprietor is; explain that she can call the business something and she would write it on forms as, for example, Connie Ndube t/a Krazy Fashions.
- She should open a bank account and ask the bank for a cheque book.
- She must register herself as a provisional income tax payer (See Income tax.)
- if she employs someone, she will have to register for SITE/PAYE tax, UIF, Skills Development Levy and Compensation for Occupational Injuries and Diseases
See Formalising the employment relationship with employees.
See Registrations as a new employer.
If Connie's business becomes very big, for example, she sells clothes to shops in Cape Town and employs 30 people, she should think of registering her business as a close corporation.
See Chart: The differences between the four types of business.
Elisabeth, Themba and Phumlani
- Three owners can choose to be a partnership or a company. Explain what a partnership is and what a company is (See Chart: The differences between the four types of business.)
- Explain the advantages of a partnership (cheaper and easier to run) and the dangers of a partnership (the court can take away the things belonging to the business to pay a partner's debts, or take away partners' goods to pay the business's debts). (See Advantages and disadvantages of the different types of businesses.)
- Explain the advantages of a company - the court cannot take away the company’s possessions (assets) to pay the debts of the members and it can only take away a member's assets to pay the business's debts if the member has signed surety. Also explain the disadvantages - it is more expensive and complicated to run a company than a partnership.
If your clients decide they want a partnership, tell them:
- to go to a lawyer to help them to write a simple partnership agreement
- they should open a bank account in the name of the partnership, and ask the bank for a cheque book
- they must register as provisional taxpayers (See Income tax.)
- all the things they have to do if they employ someone (See Registrations as a new employer.)
- If your clients decide they want a company, tell them:
- to go to a lawyer or accountant to register the company, and to find out what records they must keep
- they must always put Pty behind the name of the business and the registration number of the company must be on any letterhead
- they should open a bank account in the name of the company, and ask the bank for a cheque book
- they must register themselves as provisional taxpayers
- the things they must do if they employ people (See Registrations as a new employer.)
Running their businesses
PROBLEM 2: Starting a business which needs a business licence
Xolile lives in Noupoort. He wants to start a fish and chip shop. He is not sure whether he will start the shop in the kitchen at home, or whether he can rent a little room from the church nearby. He will be employing his wife and his brother. His sister's child will work in the shop on a Friday afternoon after school. His wife's friend Nomonde said she will make meals in her kitchen every day. He will pay her for the number of plates of food he sells every day and give the rest of the food back to her. Xolile wants to know what he needs to do to start the business.
What you can tell him
- Tell Xolile that he should be a sole trader and explain what this means. (See Sole trader or sole proprietor.)
- If Xolile sells the food from his home, he does not need a licence for his business. (See Business licences.)
But if he sells food from the church building, he must apply for a business licence.
- Xolile should open a bank account and ask the bank for a cheque book.
- He must register himself as a provisional income tax payer. (See Income tax.)
To find out at which SARS Xolile must register, look at the list of SARS. Find the big towns nearest to Noupoort, and see whether Noupoort is one of the districts under the town. Noupoort falls under Port Elizabeth. Xolile must register with the SARS in Port Elizabeth.
His wife cannot claim UIF. Also his sister's child works for less than 8 hours a week and cannot claim UIF. He must therefore not deduct UIF from their wages.
Xolile must register with the Department of Labour in Port Elizabeth. He can get a Compensation form from the Department of Labour in Port Elizabeth, but he must send it to Pretoria.
PROBLEM 3: Is being a VAT vendor worth it?
Lotando comes to see you. She owns a printing and photocopy business, called Tando's Copy Shop. Tando's Copy shop is a company. The company is registered for VAT. Lotando's problem is that she has to pay VAT to the SARS before some of her clients have paid her. She also spends lots of time every month filling in the forms. She asks you to help her.
What you can tell her
- Ask Lothando what her turnover is. Turnover means all the money which comes into the business before subtracting the money it costs to run the business. Remember to subtract 14% VAT from the turnover, because the VAT does not belong to the business. The company is collecting the VAT for the SARS. If the turnover is less than R1000 000 per year, then the company does not have to charge its customers VAT. Then she can tell the SARS that she does not want the company to be a registered vendor anymore. But it may be a good idea to stay registered if the VAT which Lothando can claim back from the SARS, which she has paid when buying things for the business, is more than the VAT the company has to pay SARS. (See Who should register as a vendor?) However there are implications when a company deregisters for VAT so it is best to speak to a professional person such as an accountant before doing this.
- Ask Lothando whether she has been subtracting the VAT she pays (called an input credit) from the VAT she pays to the SARS. (See Claiming input credits.)
- Help Lothando decide whether she should stay registered or not.
Ask Lothando to show you the invoices for all the money she spends for the business, such as paper, ink for the machines, rental for the photocopy and printing machines, rental for the premises, electricity and water. See whether she pays VAT for these things. Add all the VAT together, to see how much VAT she can claim back from the SARS.
For example, if the turnover of Thando's Copy Shop is R5 000 per month, the turnover for the year would be 12 x R5 000, which is R60 000. Tando's Copy Shop does not have to register for VAT.
The VAT on R60 000 would be R8 400. Lothando would have to add 14% to her prices. If the VAT she pays on the things she buys for her business is less than R8 400 per year, then it is a waste of Lothando's time to collect VAT for the SARS. Also, it could make her prices more expensive than her competitors'! Lothando should tell the SARS that she does not want Tando's Copy Shop to be registered anymore.
If the VAT she pays on the things she buys for the business is much more than R8 400 per year, then it can pay her to collect VAT for the SARS. For example, if the VAT she pays is R12 000 per year, it means the SARS will pay her the difference between the VAT she collects from her customers (R8 400) and the VAT she paid (R12 000). The SARS will have to pay Thando's Copy Shop R3 600.
PROBLEM 4: Drawing up a business plan
A business plan is a document that details the what, where, how, when of a business, and converts these details into a proper financial plan. Draw up a business plan by answering the following questions:
- What is the name and physical address of the business?
- What is your legal structure: sole proprietor, partnership, close corporation, company?
- Who are the owners of the business?
- What products will your business be selling?
- Are you a manufacturer or a retail business?
- What licence or permit do you need to start your business?
- How long will it take you to get such a licence or permit and where do you get it from?
- Do you know what business laws apply, such as the Labour Relations Act, UIF, Employees Compensation, Occupational Safety, PAYE, VAT, income tax laws?
- Do you have suitable premises?
- If it is not close to your suppliers, how are you going to cut back on costs of transporting the goods?
- If it is not close to your customers, how are you going to make it easier for customers to buy from you?
- Do you own the premises?
- If you are leasing, what is the length of the lease?
- By how much does your rent increase every month or year?
- If you are taking over from old tenants, are their electricity, water and telephone fully paid up?
- When will your business be open to customers?
- Will it open on Saturdays and on public holidays?
How will you protect your business from the risk of:
- theft and robbery
- public liability
- loss of profits
- What product will you be selling?
- Is this new on the market?
- Can you compete with other products on the market that are the same as yours?
- Do you know how much you will sell your product for?
- Have you calculated your total costs for making the product ready to sell?
- Do you know how much you are going to mark the product up?
- Do you know how many products you will have to sell to prevent monthly losses?
- Does the demand from customers change with the different seasons?
If so, how are you going to survive in the bad seasons?
- If you have to buy machines: what is the lifespan of the machine? Who will you buy it from? What are the maintenance requirements and how much will it cost?
- Have you got reliable suppliers for your raw materials or products?
- Will you pay cash on delivery or on credit?
- How many people will you have to employ?
- Do you need people with special skills?
- How will you find staff?
- How much are you going to pay staff?
- Do you know which business records you have to maintain?
- Can you keep records of income, expenses, assets and liabilities?
- Do you know how to make out salary cheques, including deductions for tax, UIF, etc?
- Do you know which financial reports have to be prepared? Who will do this for you?
- How many people do you need to work in administration?
- What will the costs of administration equipment and supplies be - fax machines, photocopiers, cash registers, computers and printers, etc?
Do you know how much you will have to pay for:
- rent, or loan and rates
- electricity, water
- Do you know how much money you will need to start your business?
- How much money do you have?
- How much money will you have to borrow? how long will it take to repay the loan?
Say how much each item of your business will cost. You should work this out for every month of the year. Then you should work this out for the next three years.
Support for drawing up a business plan
View the seda website: www.seda.org.za for more information.