Sole proprietor or company? When to open a Pty Ltd
For most one-person consultants and freelancers, a sole proprietorship is the better place to start. Here is where that changes.
The short answer. For most one-person consultants and freelancers in South Africa, trading as a sole proprietor is the better place to start. A Pty Ltd starts to earn its keep when your profit moves into the top personal tax bracket, when your clients insist on contracting with a company, or when you want to build a business that keeps profit inside it.
“Should I open a company?” is the question we hear most from people starting out on their own. Many assume a company is the more serious or more tax-efficient option. Often it is neither. It costs more to run, it carries more admin, and below a certain income level it does not save you any tax.
This post sets out where that line sits for the 2027 tax year (1 March 2026 to 28 February 2027), what each route asks of you, and the questions to answer before you decide.
Where a company starts to save tax
A company only saves tax on the profit you earn above R1,878,600 a year. That is where the 45% personal tax bracket starts for the 2027 tax year.
As a sole proprietor, your business profit is added to your other income and taxed at personal rates. A company pays 27% tax on its profit. When it pays that profit out to you as a dividend, a further 20% dividends tax is withheld. Combined, that is roughly 41.6% on every rand that ends up in your pocket (27% plus 20% of the remaining 73%).
| Profit band (2027 tax year) | Sole proprietor (marginal rate) | Company, profit paid out as dividends | Company, profit kept in the company |
|---|---|---|---|
| Up to R887,000 | 18% to 39% | 41.6% | 27% |
| R887,001 to R1,878,600 | 41% | 41.6% | 27% |
| Above R1,878,600 | 45% | 41.6% | 27% |
Rates: SARS, rates of tax for individuals.
Three points follow from this:
- Below R1,878,600, a company does not save tax if you draw everything you earn. You pay the same or more, plus the cost of running the company.
- Above R1,878,600, the saving is about 3.4% on the slice above the threshold only. On R2.2 million of profit, that is roughly R11,000 a year, before the extra accounting and compliance costs.
- The real difference is profit you leave in the company. Retained profit is taxed at 27% until you pay it out. If you plan to reinvest, build reserves or grow a team, that matters far more than the bracket comparison.
In practice most owner managed companies pay the owner a salary and dividends, and the right mix depends on your numbers. The table is the starting point, not the final answer.
Other reasons to open a company, and two traps
Tax is not the only reason to register a Pty Ltd. A company makes sense earlier when:
- Your clients require it. Some corporates will only contract with a registered company, often to avoid any suggestion that you are their employee.
- You are building a business, not just earning a fee. Hiring staff, bringing in a partner or shareholder, or planning to sell one day all point to a company.
- You want profit to stay in the business. As above, retained profit is taxed at 27%, not your personal rate.
- You want a separate legal entity. A company can enter contracts in its own name. Bear in mind that banks and landlords often ask small business owners to sign personal surety, so the protection is narrower than many expect.
Two rules catch one-person companies out:
- Personal service provider rules. If you would effectively be your client's employee were it not for the company, the company can be treated as a personal service provider. Its deductions are heavily restricted and the client may have to withhold employees' tax from what it pays you. Working through a company does not change the substance of the relationship.
- No small business corporation rates for most consultants. The reduced company tax rates for small business corporations do not apply to most companies that provide personal services, unless they employ at least three full-time staff who are not connected to the owners. Assume 27% from the first rand.
What each route asks of you every year
A company carries far more compliance than a sole proprietorship, and the accounting fees follow.
| Requirement | Sole proprietor | Pty Ltd |
|---|---|---|
| Registration | Register for provisional tax with SARS | CIPC registration, company income tax, PAYE |
| Bank account | Separate account recommended | Separate company account required |
| Records | Income and expense record with supporting documents | Full bookkeeping |
| Provisional tax | Two returns a year | Two returns a year |
| Annual tax return | Your personal return (ITR12) | Company return (ITR14) plus your personal return |
| Payroll | None | Monthly PAYE on your salary |
| Financial statements | Not required | Signed annual financial statements |
| CIPC | None | Annual return and beneficial ownership filing |
Even as a sole proprietor, run the business through its own bank account and pay every business expense from it. Keep the invoice or receipt for each expense. SARS can ask for them on assessment, and a clean account makes tax season simple.
Questions we hear often
I earn in euros or dollars. Does that change anything?
Not the choice of entity. As a South African tax resident you are taxed on your worldwide income, so foreign client income is taxable here wherever it is paid. You can invoice in foreign currency. As an individual you may convert at the average exchange rate for the tax year, while a company uses the spot rate on each transaction date. Receiving foreign currency for services you invoiced needs no exchange control approval. Your bank will ask for a balance of payments category on each receipt, so set that up correctly from the start.
Do I need to register for VAT?
Compulsory registration applies once your taxable supplies exceed R2.3 million in any 12 month period. This threshold applied from 1 April 2026 (it was R1 million before), and it is the same for sole proprietors and companies. Services to non-resident clients outside South Africa are usually zero-rated, but they still count toward the threshold. Below R2.3 million you may register voluntarily once you pass R120,000, which is rarely worth it for a consultant with mostly foreign clients.
What is provisional tax?
If you earn income that is not salary, you pay tax in advance through provisional tax. That means two payments a year, by 31 August and by the end of February, with an optional top-up payment by 30 September to reduce interest. It applies to sole proprietors and companies alike.
Can I start as a sole proprietor and switch later?
Yes, and for many people that is the sensible order. Start simple, build a track record, and register a company when the numbers or your clients call for it.
VAT threshold: SARS, registering for VAT.
Before you decide, answer these six questions
- What do you expect to earn this tax year, and next year?
- Do you need to draw everything you earn, or would you leave some in a business?
- Do any of your clients require you to contract through a company?
- Do you have other income, such as a salary, rental or investments?
- Are you planning to hire, take on a partner or sell the business one day?
- Have you registered for provisional tax or submitted returns on this income yet?
If most of your answers point to a modest income drawn in full, one client relationship at a time and no plans to build a team, start as a sole proprietor. If you are heading past R1.88 million in profit, leaving money in the business or building something bigger, a company is worth the extra cost.
How Accuvio Accounting can help
We help freelancers, consultants and founders choose the right structure and set it up correctly from the first invoice. That covers SARS registrations, provisional tax, bookkeeping in Xero and, when the time comes, registering and running your company.
Send us your answers to the six questions above and we will confirm which route suits you, or book a 30-minute call to talk it through. You can also email ane@accuvioaccounting.com.
Book a 30-minute callThis post is general information based on the rates for the 2027 tax year (1 March 2026 to 28 February 2027). It is not advice for your specific circumstances.