Yet compliance is a hard reality of the business world that you neglect at your peril, says Marjan Gerbrands, company secretary and corporate legal counsel at Business Partners Limited, who strongly recommends a stitch-in-time approach to the issue. If you comply right from the start, the work and costs involved are far less than trying to sort out a backlog once the authorities catch up with you.
In fact, Marjan urges young business owners to embrace compliance as a positive discipline in business. She points specifically to the King Report IV on Corporate Governance for South Africa, 2016 (King IV), a guide to the best ways of governing businesses. Until recently, the King guidelines were aimed almost exclusively at large corporations, but the latest iteration, known as King IV, contains a supplement for small and medium enterprises, including family businesses.
The King guidelines are not obligatory for non-listed companies, but Marjan believes any business can benefit from them, even as they are starting out. The guide contains invaluable principles and ways in which businesses can structure themselves, especially providing clarity over the relationship between shareholders, directors and management. She says even though start-up entrepreneurs may fulfil all of these functions themselves in the beginning, awareness of corporate governance best practice allows the entrepreneur to grow in the right way and in so doing, avoid painful restructuring in later years.
Business compliance covers several fields which a young business owner must get to know if they are to grow and thrive.
Sole proprietor or registered company?
Business compliance starts with the structure of the business. An entrepreneur can decide to incorporate or to trade as a sole proprietor. Incorporation means registering the business as a formal company, which sets it up as a legal entity separate from the entrepreneur. Trading as a sole proprietor, on the other hand, means that the business and the entrepreneur is seen as one and the same thing.
In the past, there may have been more advantages to starting a business as a sole proprietor, but nowadays the compliance burden of a closely-held company - where the shareholders and the directors are the same individuals - has been lifted so much that its advantages are overwhelming.
Registering a business helps entrepreneurs to separate their personal affairs from that of the business, and protects the personal assets of the business owner against business losses.
Company compliance includes the submission of annual financial statements and filling in a form called an Annual Company Return once a year. Official auditing of closely held companies is no longer required.
Registration of a company has been significantly simplified, and if you need to have it done quickly, you can even buy a “shelf company” - one that has been registered already, and simply change the ownership, directors, name and contact details.
Tax is a vast field of compliance, and business owners are well advised to learn the basics of it. A good accountant who is willing to explain and teach is invaluable for a start-up business. Nowadays a start-up that will be doing less that R1m rand in turnover in its first year can choose to register for turnover tax. This means the business will be paying a small percentage on its turnover in tax instead of a larger percentage on its profit. From an administrative point of view this is by far the easiest way of being tax compliant, but the downside is that you might end up paying tax even if you have not made a profit.
If you decide to pay ordinary companies tax as opposed to turnover tax, you will still benefit from a significant reduction in taxes on your profit if your business falls below a certain size. Make sure that you are registered at SARS as a Small Business Company.
Remember that you have to keep on paying tax in your personal capacity on any salary or directors fees that you take out of the business for your personal expenses.
As business manager you are responsible for deducting the employees’ tax from your workers’ salaries and paying it over to SARS on a monthly basis.
VAT is another tax that you have to collect from your clients and pay over to SARS every two months, but fortunately you only have to start with VAT once you have reached R1 million turnover per year.
Every business owner who employs even a single worker must familiarise themselves with the Basic Conditions of Employment Act, No 75 of 1997 which regulates the appointment and termination paperwork, working hours and leave. As the name implies, it is basic rules of employment which are fortunately easy to understand and implement.
The Labour Relations Act (LRA) is the other major labour law that business owners have to be aware of. It governs the relationship between businesses and unions, so is mainly a relevant to large businesses, but it also governs the disciplining of workers, and so pertains to all businesses, large and small.
Fortunately, the Code of Good Practice of the LRA assists businesses on disciplinary processes and allows small businesses to be less formal when conducting their disciplinary procedures. There is no need for small businesses to have complicated disciplinary and grievance procedures drawn up by labour lawyers.
Businesses that fall under a bargaining council have a whole different set of industry rules to abide with. Make sure to find out if your industry is governed by a bargaining council, and if it is, get to know its rules and the systems.
Industry and area-specific regulations
Depending on the industry or area you operate in, your business might be subject to several sets of regulations. Restaurants, for example, have to abide by local health regulations, and many municipalities have various signage rules and taxes relating to signage and licencing of certain types of businesses.
Your local industry association should be able to help you navigate the local regulations.
Black Economic Empowerment
For small businesses, South Africa’s Black Economic Empowerment regulations are almost entirely voluntary. If you need to opt out of the paperwork and assessments required by the system, you can simply submit a letter from your accountant stating that you are an “exempt micro enterprise”, which automatically gives you the fairly neutral BEE score of Level 4.
However, a high BEE score can give a business a competitive advantage. Many businesses will therefore find the BEE verification process a worthwhile exercise.
As is the case with almost all laws and regulations governing business, the best approach for start-up entrepreneurs is to get to know the basics of the BEE system, even if it will not immediately apply to your business.