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Before you incorporate your business, investigate the costs involved, writes Maya Fisher-French
If you are self-employed, working as freelancer or in the services industry, you may be considering whether you should switch from being a sole proprietor to registering as a business. There are pros and cons of doing so and the answer is not clear-cut, which is why I ran my business as a sole proprietor for 12 years.
When I eventually made the switch and incorporated my business a year ago, it was a good move for my business at that stage, and I don’t regret it.
While there was no real tax advantage, it professionalised my business and made managing my finances and accounts easier. What I did not count on, however, was the increase in banking fees.
Despite doing the same number of transactions as I had as a sole proprietor, I was now paying double in bank fees. All because I was now a “business”.
The only advantage was that the bank I use, FNB, offers a free accounting package called Instant Account, which has made managing my accounts much easier. That said, however, there are other free accounting services such as Wave that are suitable for a business with a relatively small turnover.
What I also discovered was that, as a newly formed business, I had no credit record, despite having run the business for 12 years as a sole proprietor. When you register a business, you effectively start a new entity with no trading history.
While banks are happy to hand out credit like candy when you open a personal account, when it comes to having a business account, they are more conservative. So, while I had a credit card with a substantial limit as a sole proprietor, which allowed me to book flights and accommodation when I travelled for work, this was not available to me once I opened a business account. This is because my personal credit record became irrelevant.
The irony is that one can draw a salary from the business and get personal credit on that salary, but the same credit would not be offered to your business. This means that, in effect, it is easier to get credit for consumption such as buying shoes and clothes on your credit card, but harder to obtain credit for business development.
You could enter a formal process of applying for credit, which involves submitting audited business accounts as well as a personal balance sheet. Keep in mind that you need to be operating for at least six months before you can provide those statements and, as a small business, you may not be employing the services of a certified accountant. All this comes with extra costs.
While extremely frustrating, I do recognise that small businesses carry significant risks. Losses on loans tend to be higher for small businesses than personal loans. Certainly, if one is applying for a large loan, the documents and vetting process are necessary, but for a small credit card limit, it appears excessive.
Despite my frustrations, FNB claims it is one of the better banks when it comes to extending credit. It has created a credit score methodology that allows for a credit facility without all the paperwork, but only after you have had the account for more than a year.
Obviously, the account would have to be well managed during that time. But, again, it takes a year to access credit. The banks could do a lot more to assess the needs and relative risks of a small business and apply some human intervention and logic.
So, if you are considering switching from a sole proprietor to a business, add banking costs and credit limits to your pros and cons list.
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