Creatives I know understanding companies and doing business can be confusing and not always as clear. These different legal persons can be very confusing – especially if you don’t have a legal background. It will also affect the WAY you do business, your tax implications and things like that.
If you have a small business and it is not registered as something yet, it is important to understand exactly what you are in for and what not. Why register a company? What does trading as really mean?
If you already have registered a company then it is also important that you understand who you are doing business with? Is your client a company? Where does everything fit in and why is it important to understand companies and do business the right way.
Before I break it down in smaller bites there is a fundamental concept in the legal and financial world – and this goes for your business AND YOUR PERSONAL LIFE. Everything between you and your partner or children.
This is really the BIGGEST CONCEPT to understand: What is a legal person?
Basically, the law works like this – there are two types of persons: a legal person and a natural person. The reason is that everything needs to be categorized in order to allocate financial or legal accountability and responsibilities. It is a way in which the world is defined. Other countries would have the same, they might just be calling it different things.
A natural person – is a real person, like a human being. Physically a person. This is important because a person can physically sign a contract and make decisions. The law also allows for taxes to be ascribed to a natural person based on your income.
Okay, so what is a legal person then?
A legal person is an entity in terms of law. If you think about the physical act of signing a contract – a company cannot physically sign it. It doesn’t have legs and arms. It has to have a person signing on its behalf. The law then acknowledges different types of legal persons i.e. companies, trusts etc and have rules about who has to act on behalf of the company and is authorized and things like that. Because it is a different type of person there are different types of taxes that apply.
Now that we have the main concept covered, let’s look at the different type of legal persons:
Companies are registered and have a company ID, just like a natural person, 2000/10235/07. There are different types of companies as well like non-profit and so on, but I am not going to go into that. A private company that a profit-making business registers will have the a (Pty) Ltd at the end of the name.
A company will also have shares and directors. Directors are the people who run the company. Just because you are a director doesn’t automatically make you a shareholder. When looking at contracting and liability when dealing with companies it is important that you include in your contract something to say that whoever is signing the contract is duly authorized to do so. If you don’t have a physical signature line then somewhere in your contract would work. If you do have a signature line, then just include it below to say: duly authorized.
On a side note: remember just because you have a company doesn’t mean you automatically can send a TAX INVOICE. You will only be sending a TAX invoice if you are registered for VAT. Otherwise make sure that you refer in all of your documents only to the word INVOICE.
If the contract was signed by a person acting falsely on behalf of the company then you might not be able to hold the company liable. (there are exceptions – this is just a general statement)
Sole Proprietors vs Company
We have discussed Companies – so what then are sole proprietors? Well you can trade and do business, earn an income without registering a company. Your “Company” would then be you with your ID number and then TRADING AS the company. Whenever you are acting in the capacity of yourself you would just be you. When you are trading as the “company” you would be trading as.
The tax implications for a sole proprietor would be the same as earning a salary and based on the sliding scale of income. To start off it is not a bad idea to just see where your creative business leads you but there are beneficial tax implications if you are a Small Business Enterprise for purposes of tax.
In summary make sure you understand the difference between the two together with the pros and cons, especially tax wise before making a decision to register a company and start trading. It is also important to understand Why a Small Business should have Contracts.