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Trading as an individual or a (Pty) Ltd?


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#1 LWVi

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Posted 19 January 2014 - 09:24 PM

Thank you for the thorough reply. A good read and some food for thought...


Edited by LWVi, 19 January 2014 - 09:26 PM.

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#2 dominant

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Posted 17 January 2014 - 10:36 AM

Hi LWVi,

 

There are numerous options here:

 

1) TRADING IN YOUR PERSONAL CAPACITY

 

Pros

- Any profits/losses can be added to/deducted from your other income (salary etc) under normal circumstances (there are exceptions if make recurring losses, ie. ringfencing if you're taxed at the maximum marginal rate, but that becomes very detailed)

- Cheaper structure than Trust or Company

 

Cons

- If you're a director, hold a bond or have any other "risks" associated with your personal capacity, your portfolio is at risk to your creditors

- Forms part of your estate and when you die, would be subject to estate duty

- Can become quite tricky on your personal tax, and will probably lead to quite a few tax queries in the future in the case of losses

- Comes administrative, unless an accountant deals with the secretarial issues

 

2) COMPANY

 

Pros

- Easily accessible for other investors as you mentioned

- Can be sold quite easily (sell the shares of the company)

- Lower effective tax rate than marginal individual rate of 40% (38.80% taking into account profits after dividends tax distributed)

- Tax affairs are easy to deal with (for accountants anyway)

- Company continues after your death (see Cons - shares)

 

Cons

- May require an audit or independent review (unless you are the sole director and hold the shares in your personal capacity, and the Public Interest Score in terms of the Companies Act is low enough, then it would just be a compilation) - which can become costly (ie. more expensive structure)

- Shares will fall into your personal estate and are not protected (same as for individual capacity) unless the shares are held in trust - which will then definitely require at least an independent review of the financial statements (costly)

 

3) TRUST

 

Pros

- Assets are protected against your creditors if you maintain the trust structure properly

- Assets don't form part of your estate (better tax planning)

- Profits can be distributed to the beneficiaries and taxed in their capacities (ie. at lower rates), unless section 7 is triggered (don't want to go into the detail here, it can become lengthy)

- Tax affairs are fairly simple to deal with (by an accountant anyway)

- Cheaper than a company structure

- No audit required unless it is required in terms of the trust deed

 

 

Cons

- Not as easy for other investors to enter as you'd have to amend the trust deed and create very specific beneficiary groups - although if you have other investors interested you can start a company and dispose of the shares in terms of group rules (a simple section 42 transaction could then transfer the portfolio into a company structure, with the company's shares held in the trust)

- Can be slightly administrative (secretarial records, trustees, resolutions etc), but much less so than with a company structure

- New legislation regarding the capital gains in trusts expected soon, and it is expected to be onerous amendments

- If profits are not distributed, it is taxed in the trust at 40%, but that's the same as the individuals' maximum marginal rate.

 

 

Hope that helps. If you want further detail you could go see an accountant (CA) or attorney on the above.

 

From the info you've supplied, I would suggest a trust as this would be the least costly whilst protecting your assets.


Edited by dominant, 17 January 2014 - 10:37 AM.

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#3 LWVi

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Posted 16 January 2014 - 09:42 PM

I have been trading as an individual for a few years now and I am...well, fairly successful.

My portfolio is getting bigger and I have wondered about setting up a (Pty) Ltd company that I will/can use to trade through.

 

I am an industrial engineer and by no means a company law expert, but I am thinking of doing this for a few reasons:

1. Keeping the share portfolio, the growth and income separate from my "day-job" finances

2. To organise the taxation in a "simpler" way - separate from my employee income tax
3. Possibly in future pay myself through the company (it is by far not that big that I can live from it yet!)
4. Building up an accountable track record to maybe involve investors (also in future).

The idea is not to find a better way dealing with tax (or tax evasion for that matter), but upfront it seems like doing it this way will be a more "orderly" manner. I have read that it is more preferable to trade as an individual. I am 38 and I still want to continue with this for many years if I can. I don't need the money in the share portfolio, so I can keep on growing it.

 

Considering the above, am I doing the right thing? Should I think totally different about this...maybe a Trust?

 

I reckon a good thing would also be to speak to a good accountant.

 

I would appreciate any advice.


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