Entrepreneurship is a mixed bag which brings along scores of responsibilities along with the satisfaction of running your own business. Right from the commencement of the journey, you need to make informed decisions like selecting the right business structure. South Africa has four types, namely sole proprietorship, partnerships, private companies and close corporations.
Most people like to choose sole proprietorship as it is convenient and hassle-free to establish and operate. It is owned by a single person and has minimum legal requirements. This is the reason why people looking for businesses for sale in South Africa are keen to acquire sole proprietorships because the owner gets to keep all the profits and it is easy to exit the business whenever you want.
As a sole proprietor, the owner includes income generated from the business in his/her income tax return and runs the organisation under his name or a trading name. However, since the business does not exist separately and is not a legal entity, there are various misconceptions related to such organisations. Let us help you debunk these myths to consider investing in this thriving business type.
1. Sole Proprietorships Are Not As Successful As Other Business Entities
It is a common perception that sole proprietorships are not professional ventures and are only created as a hobby business or to earn some extra income. Although many businesses move towards transitioning into private companies in the later stages of the growth cycle, it is not a necessity.
If the owner is capable of taking tough decisions without any help and can manage the entity with authority and complete control, there is no need to cross over. Most multinationals began as sole proprietorships, such as Amazon which was wholly owned and operated by Jeff Bezos for the initial years until it went public.
Another example is the British company, Dyson, which is still a family-owned business even after so many years of its existence. Thus success has got nothing to do with the type of business. A capable, skilled and talented entrepreneur can assure success under all circumstances.
2. Sole Proprietorships Are Fictitious Businesses
If a business does not have a separate existence from the owner, it does not mean that it is not real. A sole proprietorship has only one owner who is liable for all business obligations, such as debts of the business. All contracts are signed in the name of the owner as the business is not legally separated from the owner.
The owner can hire employees to expand operations and utilise the skills of the resources to perform better and improve the bottom-line. The owner is also liable for the negligent acts carried out by the staff members. Thus personal liability means that the owner has to pay from his assets in case of damages incurred. The business is connected to the owner, so if the owner decides to quit, the business ceases to exist.
It is entirely dependent on the entrepreneur and is a legitimate business entity which only needs registration of the trading name to start the venture. It has to face the same core business challenges that other organisations are facing. For taxes, the business owner must be registered with SARS as a provisional taxpayer and must pay tax twice in a year according to the expected profit. However, financial statements are not required.
3. Sole Proprietorships Are Not Competent
It is absolutely untrue. Being under the leadership of one person does not mean that the organisation is not professional and specialised. It is not a one-man-show. These organisations have employees who work efficiently and productively to expand the business and take it to the next level. There are a plethora of businesses running as sole proprietorships in South Africa.
According to a recent survey, 68% of female-owned businesses were sole proprietorships and 49% male-owned businesses followed the same path. The convenience of starting a business extended by this structure is what attracts trained and expert entrepreneurs to launch such organisations. They are as professional as any other business operating in the country.
4. Sole Proprietorships Are Operated From The Comfort Of Homes
Stereotyping is a widespread problem, and sole proprietorship has become a victim of it. While some sole traders do operate their businesses from home, it does not stand true for the entire population of these entrepreneurs. A segment which can work from home and does not need the assistance of staff has the liberty and flexibility to operate from home.
The others need to set up an office and hire employees, such as accountant, administrator, project managers, etc. to perform different tasks that allow a business to stay afloat. In a nutshell, the size and nature of the business determine its location rather than the type of the organisation.
5. Sole Proprietorships Struggle With Funding
It is correct to some extent that sole proprietors find it hard to secure funds for their businesses. However, it is not completely true. The struggle is only related to banks. It has become easier to lend money from other sources for such businesses. The government provides various grants for small business owners and you can also get a small business loan or a personal loan for expansion.
6. Sole Proprietorships Can’t Grow Much
Although sole proprietorships cannot sell the shares or stock to partners and investors, they can grow big successfully. The examples of several family-owned businesses are a case in point where the owners have not sold the shares to any partners and still accomplished huge success.
For example, Mars, Incorporated is a completely family-owned business and generated annual sales of US $33 billion in 2015. Mars Family is America’s third-richest family, and their net worth is approximately US $90 billion. There are many other success stories of sole proprietorships which gradually became family-owned empires that turned into world leaders.
7. Sole Proprietorships Are Risky
They are considered risky because the owner is personally liable for business debts, including bank loans, bills, pending payments to suppliers and vendors, etc. In case of a financial crisis, your assets can be seized by the bank to repay the loan. However, every business is prone to failure, and it is not associated with the type of organisation.
In fact, sole trading is far more relaxed and effortless as the owner is taxed on the business profits at the applicable personal income tax rate. The profits are a part of the owner’s tax return, and there is no dividend tax, and the owner’s earnings are exempted from PAYE.
Sole proprietorships form a big chunk of small businesses in the country and are performing well. This is the reason why entrepreneurs looking for business opportunities in South Africa must be aware of the myths associated with this type to choose appropriately.