If you’ve just started your own home business, you should operate as a sole proprietor.

Why?

Firstly, you don’t need to register to be a sole proprietor. Secondly, it’s the easiest type of business to run because the laws that govern it are simple. And lastly, (but most importantly) you can save thousands on your tax bill and you’ll only have to pay tax twice a year!

And today I’m going to show you how to do just that…

Before you register as a sole proprietor – consider this…

Before you register as a sole proprietor, you must consider two facts about the legal relationship with your client. You see, your client is not required by the Income Tax Act to withhold employees’ tax (PAYE) from money they owe you if you are an independent contractor.

The only exceptions are when:

• your services must be performed mainly at the client’s premises, and
• you are subject to the supervision and control of your client as to the manner in which your duties are performed or as to your hours of work.

Also, if, as a sole proprietor, you employ three or more employees on a full time basis (excluding relatives) throughout the year, your client may not under any circumstances deduct PAYE from the money they owe you.

Why operating as a sole proprietor will help you avoid the 80% rule

If 80% or more of your income is from one client you should definitely be operating as a sole proprietor. You see, if you operate as a close corporation, company or business trust, your client has to withhold PAYE when more than 80% of your income comes directly or indirectly from any one client. But the 80% rule doesn’t apply to you if you operate as a sole proprietor.

Claim these business expenses and bank more money each month

If you work from home through a close corporation, company or trust, the taxman sees the entity as a personal service company or trust. So you won’t be allowed to claim your home office expenses as the premises and business assets are not used wholly and exclusively for business purposes. But as a sole proprietor you can claim a tax deduction for all expenditure incurred in the production of your income. If you work from home, you can claim a deduction on your direct and indirect business expenses. A direct expense would be something like the purchase of a fax machine, while an indirect expense would be travel costs for business purposes.

Earn interest while you wait to pay tax…

If you draw a salary from a close corporation, company or trust, you must pay PAYE on that salary by no later than the 7th day of the following month. As a sole proprietor, you are only required to pay provisional tax every six months on the taxable income generated over the period i.e. after the deduction of your business related expenses. This gives you a huge cash flow advantage to protect you against the harsh realities of fluctuating earnings. Plus, you’ll be able to earn interest on your earnings while you pay to SARS.

Compliance is easier and cheaper

As a sole proprietor, working from home, with no employees, you don’t have to submit monthly PAYE, SDL and UIF returns to SARS. If your turnover is more than R300,000 per annum, you only have to submit VAT returns bimonthly. You are also not required to engage the services of an accounting officer as is the case with a close corporation and an auditor in the case of a company.

Remember, making your new business a success is hard enough. Operating as a sole proprietor will help reduce your operational costs while you enjoy the tax benefit of deducting your home office expenditure.