Basic Accounting & Taxation

1. Types of businesses

2. The key types of Accounts in our Accounting System

3. How to Understand Debits and Credits 

 

 

1. Types of businesses

If you want to start a business, you must decide which type of business you want. There are a huge number of factors that you should take into account of which

the tax implication is arguebly the most important.

  • a sole proprietor
  • a partnership
  • a close corporation  (From 1 May 2011, no new Closed Corporations can be requested or conversions from company to Closed Corporation allowed. However existing entities can continue to operate).
  • a company

Sole proprietor (owner)

A sole proprietorship means one person owns the business.

A sole proprietor does not have to register a business, for example, Vusi starts a shoe repair business which he calls ‘Cool Leather’ and runs it from his home.

As Vusi, a sole proprietor, has given the business a name, he must refer to it in any business dealings as ‘Vusi Mahlangu t/a (trading as) Cool Leather’.

TAX IMPLICATION:

According to the 2016 Budget speech the tax implications for persons/ sole proprietors are:

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partnership

A partnership is a business that has between 2 and 20 partners who own the business together. If two or more people want to start a partnership, they should sign a written agreement. The agreement must include these points:

  • what happens to the assets of the business, for example, the tools and the furniture, if the partnership ends;
  • how the partners will share the profits;
  • what happens if one of the partners wants to leave the partnership.

Every time a new partner joins, the partners must sign a new agreement. 

If Vusi, decides to run his Cool Leathers as a partnership, he must refer to the business as a partnership.

The profits derived from the partnership will be devided as per the written agreement

TAX IMPLICATION:

The individual partner wil be taxed on his share of the profits as per the tax tables referred to under sole proprietor.

Close corporation (CC)

A close corporation is like a company, only less expensive and less complicated to run. From 1 May 2011 no new CC’s can be requested and the conversion from company to CC is also not allowed.

CC is more expensive to run than a partnership or sole proprietor because you need to pay an ‘accounting officer’ to do the books of the business. You also have to keep records for the CC and each member has to keep records for tax purposes.

The people who own and manage the close corporation are called members. A close corporation cannot have more than 10 members.

The law sees a close corporation as separate from its members. This means that unlike a sole trader and a partnership, the assets and debts of the business belong to the close corporation, and the assets and debts of the members have nothing to do with the CC.

Financial reporting has been aligned with that of a company. From 1 May 2011 a CC may be subject to an independent audit or accounting officers report. The criteria will be the same as that of a company.

If the business is a CC and the CC has a letterhead, the registration number of the CC and all the names of the members must be printed at the bottom of the letterhead. The registered name and number must also appear on cheques.

Signing surety

Suppliers may be scared that a CC has no money to pay. Suppliers therefore often make sure that somebody signs surety for the CC, which means that if the CC does not have the money to pay, the person who has signed the surety will have to pay (be liable for) the debt.

Members of a close corporation must always write CC behind the name of the close corporation, for example Cool Leathers CC. If members do not put CC behind the name whenever they write it, then the law does not see the CC as separate from its members and the debts and assets of the CC are not separate from the debts and assets of the members.

If the business is a CC and the business has a letterhead, the registration number of the CC and the full names of the members must be printed on the letterhead. The number will look something like this: CK2008/031666/23.

If the business has an office, then the owner must have a sign up showing the business is a CC. For example, if Anna has a dry cleaning business, then she must have a sign up saying "ANNA’S DRY-CLEANING SERVICES CC’.

TAX IMPLICATION:

According to the 2016 Budget speech the tax implications for Close Corporations and Companies are:

 

 

 

 

 

 

 

 

 

 

 

 

PLEASE NOTE!!!!

The Small Busiess Corporation tax rates apply if:
 
• All shareholders or members throughout the year of assessment are natural persons who hold no shares in any other private companies or
members’ interests in any other close corporations or co-operatives other than those which:
- are inactive and have assets of less than R5 000; or
- have taken steps to liquidate, wind up or deregister (effective for years of assessment commencing on or after 1 January 2011).
 
• Gross income for the year of assessment does not exceed R20 million (2013 : R14 million)
 
• Not more than 20% of the gross income and all the capital gains consists collectively of investment income and income from rendering
a personal service. Investment income includes any annuity, interest, rental income, royalty or any income of a similar nature, local dividends,
foreign dividends (as from 1 April 2012) and any proceeds derived from investment or trading in financial instruments (including futures, options
and other derivatives), marketable securities or immovable property. Personal service includes any service in the field of accounting, actuarial science,
architecture, auctioneering, auditing, broadcasting, consulting, draughtsmanship, education, engineering, financial service broking, health, information
technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science, which is performed
personally by any person who holds an interest in the company, co-operative or close corporation,except where such small business corporation employs
three or more unconnected full-time employees for core operations throughout the year of assessment.
 
• The company, close corporation or co-operative is not an employment entity.

Company

Companies have to obey all the rules of the Companies Act, which is a long and complicated law. On 1 May 2011 the Companies Act, 2008 became the new regulating law. Up to that date the Companies Act 1973 was enforced. Existing companies are subject to the transitional measures as defined in the new Act,

If more than 10 people want to start a business together, they will have to go to an accountant to form a partnership or a company. The usual way to start  a compay is to buy a shelf company. These are companies that are already formed.

A company has shareholders and directors. Shareholders can be people or other companies or Trusts or CC’s. Shareholders put the money into the business and are the owners of the business. Directors are the managers of the business. Sometimes the owners and the managers are the same people and sometimes they are different people.

The law sees a company as separate from its shareholders and directors. This means that like a CC, the assets and debts of the business belong to the company and the assets and debts of the shareholders and directors have nothing to do with the Company.

Suppliers or banks, which lend money to companies will often ask the shareholders or the directors to sign surety for the company. If the company cannot pay its debts, then the people who have signed surety will have to pay the company's debts.

Directors and shareholders of a private company must always write Pty (Ltd) or Pty (new Act) behind the name of the company. If they write the name of the company without writing Pty (Ltd) or Pty behind it, the law does not see the company as separate from its shareholders, and the debts and assets of the company are not separate from the debts and assets of the shareholders.

TAX IMPLICATION:

Please refere to the tax implications under Close Corporations.

 

2. The key types of Accounts in our Accounting System:

To understand how to record bookkeeping transactions, we must understand that all of the accounts fit into one of 5 categories. 

The account categories are:

  • Assets: what the company owns of value (Cash, Accounts Receivable, furniture, vehicles)
  • Liabilities: what the company owes to others (loans, Accounts Payable)
  • Equity: the company’s net worth. Equity equals Assets minus Liabilities
  • Revenue: money the company is earning
  • Expenses: money the company is spending

3. How to Understand Debits and Credits 

  • Generally these types of accounts are increased with a debit: Dividends, Expenses, Assets, Losses.You might think of D - E - A - L when recalling the accounts that are increased with a debit.
  • Generally these types of accounts are increased with a credit: Gains, Income, Revenues, Liabilities, Stockholders' Equity. You might think of G - I - R - L - S when recalling the accounts that are increased with a credit.