Sole Prop vs Pty, what should I trade as?

 When setting up a new business, entrepreneurs always ask, “What should I trade as?”
Today, I’m breaking Sole Prop vs PTY (from a tax and earnings point of view).

Let's consider an example of a business in South Africa, ABC Consulting, operated by an entrepreneur named Sarah. We'll compare the tax implications and earnings of Sarah operating as a sole proprietor and as a Pty Ltd company.

Disclaimer: Assuming Sarah is the only owner of the business and does not qualify for any small business tax breaks.

Sole Proprietorship - Sarah's business income is taxed at personal income tax rates which is between 18-45% in South Africa. Let's say ABC Consulting earns a profit of R200,000 for the year.
Sarah's income tax rate based on her earnings is 18%, so she would owe R36,000 in income tax on her business earnings. Sarah's take-home earnings from ABC Consulting would be R164,000 (R200,000 - R36,000).

Profit: R200 000
Tax: R36 000
Earnings: R164 000

Pty Ltd Company - ABC Consulting Pty Ltd is subject to corporate tax rates, which are currently 27% in South Africa. Let's assume the company earns the same profit of R200,000 for the year. As the owner and director of the company, Sarah can pay herself a salary from profit before tax or dividends (dividend tax is at 20%) from retained earnings (after tax).

Looking at the example above, we can see that Sarah earns more trading as a Sole Proprietor. However, as her profit increases, Sarah may face higher personal income tax rates(18%- 45%) on her earnings from ABC Consulting.

Establishing ABC Consulting as a Pty Ltd company provides limited liability protection and potentially lower tax rates on business profits. However, it comes with additional compliance requirements and administrative responsibilities.

Ultimately, the decision between operating as a sole proprietor or Pty Ltd company does not only depend on the tax or earnings but also factors such as legal, business objectives, risk tolerance, and long-term growth plans.

For a further comparison between the two, take a look at the table I have created for you: Sole Proprietor vs Pty Ltd.

Sarah needs to consult with financial and legal professionals to make an informed choice that aligns with her business goals.

If you are like Sarah -  get in touch and book a consultation.