Thursday, 2 April 2015

Working From Home Series- Getting Started with Your Startup

We previously blogged on the idea of working from home and what you should consider before making the decision to do so (see previous post here). 

So now you have had that big epiphany as to what business you will start and have made the big decision to work from home. You have a business plan in place and have done your market research (if not, go one step back- a business plan is crucial!). You have set aside some space at home for your home office and are ready to get started.

What next? Well, you will have to sort out some of the more tedious details. First get lots and lots of coffee (and make sure you include a good coffee machine in your office equipment list) and then proceed to the steps below.

(Note: the below information is of a general nature and should not be construed as legal or financial advice. Please consult a professional where required). 

  • Branding is a whole topic on its own, but to begin with, you will have to create a brand for your business by creating a name for your business, a logo, a website, get business cards, a business letterhead etc. 
  • Consider how you will keep your business financial records and whether you can do this yourself or if you need the services of a part-time bookkeeper going forward.
  • You will need to set up a business bank account. It is worth your while to shop around and compare pricing and also the services the various banks offer to start up businesses. Your bank may turn out to be an invaluable business partner in the initial set up phases as it is in their best interest for your business to thrive. If you require funding, while banks are not your only option, it is the most common choice.
  • Regardless of your business type, you will need to check what the requirements are in terms of income taxes, VAT etc. and do the necessary registrations in this regard via the Receiver of Revenue. (You will do this after your company registration if you are going to be trading as a company).
  • Do some research as to the compliance requirements for your business and how you will be affected by legislation like the Companies Act or the Consumer Protection Act. Depending on the industry, certain licenses may be needed. Seek legal advice if necessary.
  • If you are employing staff, you will also have to register for UIF (unemployment insurance fund), PAYE (pay as you earn), COID (compensation for injuries and diseases).  These are done via the Department of Labour.
  • Consider whether you need business insurance, including liability insurance and key person insurance.
  • You will also need to consider whether your business will require BEE certification. While small start ups are typically exempted from having to apply for a BEE certificate, it may give you a competitive advantage to do so.
  • Finally, how will you trade? You might choose to be a sole proprietor, close corporation, private company, partnership, trust etc. Each of these options have important consequences and it is important to know what the pro's and cons of each option are (and also ensure that you understand the tax consequences of each). Once you have decided on the type of entity, you will need to proceed with the necessary name reservations and registrations (if any). We will go into some detail regarding the options as to the type of business entity below.

1. Sole Proprietorships

This is the simplest form of business and has no formal requirements to start up. Basically, you are the business and there is no separate legal structure, making it a very easy and simple option. You will have to pay taxes on your income but this will not be separate from your personal taxes, some of which you can set off with business expenses.

The downside is that your personal assets are not separated from your business at all and if the business fails, your personal assets are at risk. If you are married in community of property, your spouse's assets are also at stake. 

The new Companies Act requires trading as names to be registered with CIPC if you trade in a name other than your own.

2. Close Corporations (CC's)
This form of business has been discontinued and new CC’s may not be registered. You may buy and transfer membership of an existing CC but there is no real benefit in doing so.

3. Partnerships
A partnership may be set up between two to twenty individuals going into business together. Like a sole proprietorship, there are no real formalities, although a written partnership agreement is not a legal requirement, it is recommended that you do have one in place, preferably professionally drafted.

The downside is that, like a sole proprietorship, the assets and liabilities of each partner are linked to the business and creditors may attack personal possessions if the business fails. You are also liable for all of the partnership debts, even if incurred by another partner. The partnership also ceases to exist if one partner dies, in which case a new partnership has to be constituted.

4. Private Companies ((Pty) Ltd)
The new Companies Act aims to make it simpler to set up a private company. The advantage of having a company is that the company is a separate legal entity, so your assets are separate from those of the business and in most cases, only the capital that you have invested is at risk. Trading by way of a company can create a more professional image and instil confidence in potential clients.
If you trade by way of a company, there will be a lot more formalities required, board meetings, resolutions etc. However, this structural formality may be a blessing in disguise as it will force you to operate in a disciplined manner.

The company will be owned by one or more shareholders and managed by one or more directors who will run the company. For a home business, it is likely that you will be the sole director and sole shareholder.

So how do you start a company? The company has to be registered with CIPC (you can do this yourself and the forms are available from their website but it is time consuming, especially if you are new to the process). It is recommended that you consult with an attorney or chartered accountant who can advise you on the best structures for your company and handle all the paperwork needed in order to register. You will need to submit annual returns and companies of a certain size will need to be audited.

Note: there are various other types of companies, including public companies, personal liability companies (those ending with "Inc") and non profit companies (those ending with NPC") but we have looked primarily at private companies as these are the most likely fit for businesses run from home.

5. Business Trusts

A business may also be set up as a trust, which is formed by way of a trust deed registered with the Master of the High Court. This vehicle is often used for family businesses as it allows for some form of business continuity from generation to generation. There are also slightly fewer formalities than with companies.

On the flip side, trusts are taxed at a high forty percent in South Africa. In addition, you need to know what you are doing as a poorly drafted trust deed can severely restrict your ability to conduct business.