The legal form you trade under drives personal liability, tax rates, funding options, and ongoing admin. South African SMEs usually choose between sole proprietor, private company (Pty Ltd), or continuing an existing close corporation (CC) — new CC registrations are no longer available.
Sole proprietor
Simple and fast: income and expenses generally flow through your personal ITR12. The trade-off is unlimited personal liability — business creditors can reach personal assets. For small, low-risk service businesses this can work; it becomes strained as turnover, staff, or contractual risk grow.
Pty Ltd (private company)
A separate legal person: limited liability for shareholders if governance and statutory duties are respected. Corporate income tax applies (rate subject to current law — confirm with your adviser for your year). You get a cleaner cap table for investors, clearer roles for directors, and a structure banks and large customers recognise.
If turnover, payroll, or liability are rising, Pty Ltd is usually the default recommendation even though CIPC and accounting compliance cost more than a sole prop.
Existing CC
CCs grandfathered under the old Act can continue or convert to a company. Members should review whether the CC still fits growth, BEE, and funding plans.
Practical rule of thumb
- Testing an idea, very small scale: sole prop may suffice for a short phase.
- R500k+ turnover, staff, stock, contracts, or any meaningful liability: strongly consider Pty Ltd.
- Partners or investors: use a company and a written shareholders' agreement.
Active Accounting helps you model the tax and compliance impact before you change structure.
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