Building a Business: Should You Bring in Funders or Go it Alone?
“As an entrepreneur, one of the biggest challenges you will face will be building your brand. The ultimate goal is to set your company and your brand apart from the crowd.” (Ryan Holmes, Founder and CEO of Hootsuite)
Trying to get a business off the ground is challenging. Every step of the process requires a mountain of time and investment. Choosing between going it alone or involving others as partners or investors is a decision that should not be taken lightly. In this article we’ll break down the options available and take a look at the pros and cons of each.
- Going it aloneSelf-funding, also known as bootstrapping, is when a business owner goes it alone, providing all funding, time and energy themselves.
Pros of bootstrapping
Whether you’re finding the money from savings, or your monthly pay cheque at another job, bootstrapping is perfect for the entrepreneur who wants full control over their business. With no partners on board, all decisions are yours to make, and all the profits, achievements, and losses are yours alone.
Apart from the independence it offers, bootstrapping can also be easier. There’s no time spent filling in application forms or putting together pitch decks to impress would-be investors. There is also no accrued interest on the debt involved and no loss of equity in your own business. This makes running the business far simpler.
Cons of bootstrapping
On the downside, bootstrapping can be much slower. Each cent spent on the business needs to come from your own pocket and so necessary investments need to be prioritised from month-to-month. Things that are essential for success may need to wait another month – and this can mean your break-even point takes longer to arrive.
Bootstrapping also increases your chances of failure, as some expenses simply can’t wait if you want to make money. Bootstrappers are also more likely to become frustrated with the slow pace and give up.
- Tapping into venture capitalVenture capital (VC) is one of the most popular routes for finding funding in entrepreneurship. This is where a company or an individual provides funding to your business in exchange for a percentage of ownership.
Pros of VC
Venture capitalists are able to offer significant investment in the company and can often provide all the funding necessary to take the company from start-up to established business. What’s more, venture capitalists likely come with significant experience in business and a strong network of contacts.
Cons of VC
Working with venture capitalists requires that you give up some control of your business. This new partnership can create friction if the person who pays the bills doesn’t share your ideas of where the company should be headed. In some instances, their investment may even give them a majority stake and the dream you had of being your own boss might now be a thing of the past.
- Touched by an angel (investor)Angel investors are also happy to provide the financing necessary for your business to thrive. Unlike VC, however, they are typically looking to take a more background role and are hoping to cash in when your company has become established.
Pros of angel investors
Angel investors generally offer more flexibility than VC. They aren’t looking to get involved – they’re looking for business owners and ideas that stand a good chance of succeeding without their intervention. This means they’ll often provide funding to businesses others may not touch.
Cons of angel investors
Angel investors are looking for part ownership of the business and you should therefore expect to lose some of the equity in your company. Because they’re investing without getting involved, angel investors know they may lose their money. This means they are generally unwilling to invest as much time or money as a venture capitalist might, so you should expect to still do some of the bootstrapping yourself.
Remember that angel investors are interested in one day getting a big payoff. They are looking for that moment when the company can be sold or listed on a stock exchange. This means they may pressurise you to make decisions that aren’t necessarily in the company’s best interests.
- Borrowing from the bankAn old-fashioned bank loan is another way of bringing money into a business.
Pros of bank loans
Taking out a bank loan gives you the money you need to grow the business. You also do not lose any equity in your company.
Cons of banks loans
The interest on a loan can be problematic and over time may add up to a significant amount – often the cost of debt is much higher than the cost of giving away equity to investors. If the company fails, you may still be required to pay off the loan in your personal capacity. There may also be some trouble securing the loan in the first place: banks want to know that they are lending to people who can pay them back!
The bottom line
Accessing funding is a decision you should consider carefully. Ask yourself what you need from your business, what you can afford and just who you would be going into business with.
Your Tax Deadlines for January 2025
- 07 January – PAYE submissions and payments.
- 20 January – End of Filing Season 2024 for Provisional taxpayers & Trusts.
- 24 January – VAT manual submissions and payments.
- 30 January – Excise duty payments.
- 31 January – VAT electronic submissions and payments, & CIT Provisional Tax payments where applicable.
Starting a New Business? Here Are the Tax Implications…
“A goal without a plan is just a wish.” (Antoine De Saint-Exupery, author of The Little Prince)
Want to start a business? SARS warns you to be aware of the tax obligations of running a business, whether it’s in the form of a legal entity or in your personal capacity.
Considering the tax implications before starting a business will result in substantial benefits down the line. These include better budgeting and cash-flow planning, cost savings, and easier administration and compliance.
Pound of flesh
Depending on the type of business entity you establish, different tax rates and rules apply. On the flip side, certain tax incentives and opportunities to reduce the administrative burden may be available.
Legal entities like private companies, close corporations (CCs) and non-profits are automatically registered with SARS for corporate income tax when they register with the Companies and Intellectual Property Commission (CIPC).
This is not required for a non-legal entity like a sole proprietorship or partnership. In these cases, the owner or partners are taxed in their individual capacities on their share of taxable profits. Certain tax rebates and credits apply, which can reduce overall tax liability.
Legal entities may qualify for different tax incentives and preferential rates like the turnover tax system, the small business corporation (SBC) incentive, or accelerated deprecation relief available in Urban Development Zones.
Corporate Income Tax (CIT)
Every business (legal entity or individual) is liable for income tax. But the rates of taxation – and the rules – can vary widely.
- For companies (including CCs) the standard corporate tax rate is 27%. In addition to filing an annual return, companies are required to submit provisional tax returns twice a year – and to make the required payments on time.
- Turnover tax is a possible alternative for sole proprietors, partnerships, CCs and companies with a qualifying annual turnover not exceeding R1 million. This simplified annual tax, calculated on your turnover, replaces income tax, provisional tax, VAT, capital gains tax and dividends withholding tax (if the annual dividend does not exceed R200,000). This substantially reduced administrative burden is a significant benefit for small businesses. The first R335,000 of annual turnover is tax exempt – and the highest tax rate is just 3%.
- Qualifying companies may register as a small business corporation (SBC) for additional tax incentives, including a tax exemption for the first R95,750 of annual taxable income, and a reduced corporate tax rate up to a taxable income of R550,000.
Employee taxes
Every employer must register for pay-as-you-earn (PAYE), deduct it from remuneration paid to employees (along with Unemployment Insurance Fund contributions) and pay it over to SARS. Once annual salaries, wages and other remuneration exceed R500,000, the Skills Development Levy (SDL) also becomes payable.
As an employer, you must submit monthly returns and payments to SARS. There are also two compulsory reconciliations during the year.
Some relief is available through the Employment Tax Incentive (ETI), allowing for a reduction in PAYE for qualifying companies that employ young people.
VAT (Value Added Tax)
VAT registration becomes compulsory if the value of invoices raised by an entity (or is expected to be raised due to a written contractual obligation) exceeds R1 million in any consecutive 12-month period.
Your business can also choose to register for VAT voluntarily. This will benefit businesses with sizeable VAT input claims.
New businesses should factor in the increased administrative requirements of VAT registration and compliance. There are also cashflow implications as your business has a VAT liability before payments on invoices are received – a significant risk if invoices are paid later than expected.
Other taxes that may apply
- Companies that import or export goods must be registered (and will be liable) for customs and excise taxes.
- A dividends tax of 20% must be withheld by the company and paid to SARS when its shareholders earn dividends.
- Depending on the industry and the specific business activities, further taxes such as carbon tax, sugar tax, transfer duties, and Capital Gains Tax (CGT) may be applicable.
Tax implications for business owners
Business owners who pay themselves a salary will already be paying PAYE. If there are no additional income streams, they don’t need to register for provisional tax.
If, however, a business owner receives any other income in addition to this salary, whether from another source, or dividends or investment income from the business, registration as a provisional taxpayer may be necessary if the requirements of the provisional taxpayer definition are met.
New business owners often can’t draw a salary for some time. Personal expenses paid by the company can be allocated to a loan account, or the owner can draw down a loan. These expenses will unfortunately not be deductible for CIT purposes.
The most tax-efficient solutions for your new business
When starting a business, tax planning is critical. It adds significant value and protects you against unexpected tax liabilities.
