SOLE PROPRIETOR – TRADING IN YOUR NAME IS THE BEST?

Per definition, a sole proprietor is a business that legally has no separate existence from its owner (the individual). Income and losses are taxed on the individual's personal income tax return, and the owner is liable for the business debt. The sole proprietorship is the simplest business form under which one can operate a business. Many times, the advantages of trading as a sole proprietor is overlooked.

Income Tax

Assuming N$2,000,000 taxable income in a financial year.

For the business operated as a sole proprietor, normal tax rates for individuals apply, thus per tax tables the highest tax rate of 37% is applied and the calculation is as follows:

Tax payable per tax table             N$     429,000

Amount over N$1,500,000           N$      185,000

Profit after tax                               N$  1,386,000

For a business owned by a private company, the company tax rate will be 32%. Thus, the company will pay N$640 000 tax , leaving it with N$1,360,000 profit after tax. 

Conclusion – You save 4% income tax in operating your business as sole proprietor versus a private company.

Capital Gains Tax

 * Not applicable in Namibia *

Costs

There are no setup costs for a sole proprietorship, and you merely register your name and start trading. To operate as a private company, one needs to register the legal entity with the Namibian Registrar of Companies. Obviously, there is a cost associated with the registration.

Apart from the initial setup costs, the costs of operating your business as a private company increase over time (versus a sole proprietor), because you will now have to operate two bank accounts, complete two sets of tax returns, two sets of financial statements and the like.

Risks

The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. This is also the main reason why bankers, accountants, attorneys and other advisors will recommend the establishment of a company in order to limit the liability of the business owner.

In general, landlords, suppliers, service providers or any other creditors of a small or medium business that require the owner or shareholder of a private company to sign personal surety for the debts of his or her company. In so doing, the business owner finds himself in the same position and liable for the company’s debt. Next time you want to sign the lease agreement with the corporate landlord, or the franchise agreement or want to finance equipment with your bank, read the small print of surety document.

Also note that the Companies creates a scenario where directors and prescribed officers of a private company can be held liable in accordance with the principles of common law, not only for the company’s debt but also due to breach of fiduciary duty or delict.

Regulatory Protection

Consumer Protection Act is not applicable in Namibia. 

Admin

It is also easier and straight forward to produce your personal information when required in terms of FICA regulation. The same cannot be said for a private company, where one often needs to struggle through the red tape to comply with the requests from financiers with regards to the FICA documentation for a private company. This only creates more paperwork.

The administrative burden of handing in annual returns to CIPC is only applicable to companies. Sole proprietors do not need to submit a document to any regulatory body to confirm that they are still trading.

There are many advantages of trading as a private company depending on the nature and size of your business. This brief overview is but a small example of some of the advantages of trading as a sole proprietor. When buying a business, always seek professional advice for the most suitable format.

According to Receiver of Revenue, a sole proprietorship is a business that is owned and operated by a natural person (individual). This is the simplest form of a business entity. The sole proprietorship is not a legal entity. The business has no existence separate from the owner, who is called the proprietor. The owner must include the income from such a business in his or her own income tax return and is responsible for the payment of taxes thereon. A sole proprietorship can operate under the name of its owner or it can do business under a fictitious name. The fictitious name is simply a trade name, it does not create a legal entity separate from the sole proprietor owner. Only the proprietor has the authority to make decisions for the business and assumes the risks of the business to the extent of all of his or her assets whether used in the business or not.

Some advantages

• Simple to establish and operate.
• The owner is free to make decisions.
• Minimum of legal requirements.
• Owner receives all the profits.
• Easy to discontinue the business.

Some disadvantages

• Unlimited liability of the owner. The owner is legally liable for all the debts of the business. Not only the investment or business property but any personal and fixed property may be attached by creditors. The owner signs contracts in his or her name, because the sole proprietorship has no separate identity under the law.
• Limited ability to raise capital. The business capital is limited to whatever the owner can personally secure. This limits the expansion of business when new capital is required. A common cause for failure of this form of business organisation is a lack of funds. This restricts the ability of a sole proprietor to operate the business effectively and survive at an initial low-profit level, or to get through an economic “rough spot”.
• Limited skills. One owner alone has limited skills, although he or she may be able to hire employees with sought-after skills.