PAYING YOURSELF AS DIRECTOR/OWNER OF YOUR COMPANY
So, you’ve just registered your business with the CIPC, gotten your company’s tax number, been placed as a Director and appointed a Public Officer. Say hello to the CEO!
It’s a small company with no employees, it’s just you (and your business partners). The company starts making profits and you want to keep your company account and personal account separate.
You’ve set up a Memorandum of Incorporation that allows for directors to be remunerated. You’re looking for ways to pay yourself and your partners/shareholders – so what now?
Well, you have a few options, each with its own benefits and drawbacks:
Directors’ Drawings
This is effectively a ‘loan’ the Director takes from the business and is credited as such in the books of the company. It’s a quick and easy way to start benefiting from your business’s earnings.
The downside is that this is a non-deductible liability so your taxable income amount doesn’t change, and you will have to pay back the loan eventually.
Dividends
As an owner/shareholder of your company you have a right to share in the profits of your company. Declaring a dividend is how you do that. This comes with a host of procedures, though. First, the company needs to settle its income tax obligations, once that’s done the shareholders can decide how much of the profit after tax gets distributed.
Here’s the catch; SARS imposes a further tax of 20% on those dividends before they’re paid out – so at the standard corporate tax rate of 28%, you basically end up paying 48% tax on the dividends distributed.
Salary
A salary is a good alternative to Drawings or Dividends. It means a stable amount that you can expect to receive every month along with being a deductible amount against the business for tax purposes.
The drawback here is that the company has to register for Pay As You Earn (“PAYE”), Unemployment Insurance Fund (“UIF”) contributions, and issue an IRP5, which then gets sent to you and SARS. Why is this a drawback? Well, at this stage of your company’s size, the company is you! So, you’ll be the one having to fulfill these obligations on the company’s behalf either way. If you’re not careful, it can become a procedural nightmare.
Directors’ Fees
This is effectively an alternative to paying yourself a salary. It’s great for when you need some funds to carry personal expenses, but company profits are too volatile to consider receiving a salary. You basically invoice the company for services rendered and get paid accordingly, which payments from the company are deductible against the company’s tax liabilities as well.
The disadvantage of this is that you don’t receive an IRP5 from the company and you become responsible for registering yourself as a provisional taxpayer with SARS. From there you need to make sure you’re paying the correct amount to SARS every 6 months as per your PAYE obligations. Depending on how much you invoice the company, the tax rate will fluctuate when it's time to pay SARS.
So what should you do? The best thing to do at the beginning of your entrepreneurial journey is to make sure you consider all the options that are in front of you. Once you have figured out what works, it's vital to ensure that all of your paperwork is in order for both the company and yourself personally. The worst thing you can do is treat your business’s money like it's your own!
Knowing which option is best for you and your company can be daunting, but it doesn’t have to be because there’s always a legal solution!