Firstly, What’s the Meaning of Pty Ltd?

Pty Ltd stands for Proprietary Limited.

• Proprietary means that the company is private (rather than publicly owned or listed) and therefore, would have a smaller number of shareholders and owners in the company.

Limited refers to limited liability.

• This means that the shareholder’s responsibility for company debts or liabilities are limited based on the shares they own. If a business were to become insolvent and no longer be able to trade, the shareholders would only have liability in losing the money they used to invest in their share of the business.

If you’re a sole trader or in a partnership, you’re likely assessing Pty Ltd Company advantages and whether setting up a Pty Ltd Company would be suitable for your situation.

Many clients ask me why they should set up a Pty Ltd company. The answer to that is – it depends.

Here are a number of things to analyse first, before you pull the trigger.

1. Access to business:

• Funding is more easily acquired by registered businesses. Banks do not give business loans to unregistered companies, as the risks are too high for them.
• Similarly, investors will only put money into a business which they feel has great potential. Not being registered will likely count against you.
• A PTY will allow you to get B2B contracts as B2C contracts are less popular.

That being said, if you a) don’t need financing OR b) don’t intend to sell parts or all of your business OR c) don’t intend to go into business with partners, then you can ponder this a bit more.

2. Limited Liability, Separate legal entity:

• As a Pty Ltd Company is a separate legal entity, it will be liable for its own debts.
• This ensures that claims made against the company can only be paid using assets owned by the company.
• This gives a layer of protection for directors’ and shareholders’ personal assets.
• Unlike Pty Ltd Companies, sole traders may be exposed to having their personal assets called upon to settle claims or debts.
• What is the chance of your company being sued or creditors claiming from your company?

The greater the risk, the greater the need for a separate legal entity. Furthermore, if you are the sole director, sole shareholder, sole employee of your company, are you really separate from your company? Think about that for a second.

3. Cost of business:

• The added cost of operating a registered PTY can easily skyrocket due to it’s legal obligations.
• The moment you register the PTY, that requires the need for CIPC services, accounting services and tax services.

If your point of operating as a business is to save on tax, but your legal, statutory and accounting costs are more than the tax saving… aren’t you just more out of pocket?

4. Taxes: Company tax is flat 28%:

• Math will tell you that an individual must earn more than 800k before they cross the 28% effective tax rate.
• This means that unless your PTY is actually a small business corporation, if the profit is less than 800k, an individual pays less.

Note: It’s easier to claim expenses in a registered PTY, as SARS assumes that a company trades. SARS does not make that assumption with individuals. HOWEVER, if proper bookkeeping is done for the individual, then this is easily overcome.

5. Finally, what type of company are you running? Your goal?

• a) A growth company that you intend to sell one day?
• b) A company that gets B2B contracts every 6 months?
• c) A one person show with high margins?

You need to analyse the need for a registered company beforehand.

FINANCIAL REPORTING & ACCOUNTING: In terms of the Companies Act:

Section 28: Accounting Records

All companies are legally required to keep, at their registered office, accurate and complete accounting records in one of the official languages of SA.

Section 29: Financial Statements

All financial statements must comply with the requirements of the Companies Act. (e.g. must not be false or misleading in any material respect or incomplete in any material, summaries must be in prescribed format).

Section 30: Annual Financial Statements (AFS)

All companies are required to produce AFS:

• Within 6 months after the end of their financial year.
• Must include and auditor’s report if the statements are audited.
• Must include a report of directors in the prescribed format.
• Be approved by the board and signed by an authorised director.
• Be presented to the first shareholders meeting after the statements have been approved by the board.

The High Court has recently issued court orders in favour of CIPC empowering them to penalise companies that fail to prepare AFS within 6 months of year end. The penalty is 10% of turnover during the period which each company was non-compliant.