start your own business

Want to Start Your own Business? Beware the Risk When Purchasing Property

While it is common to purchase property in your own name or with your spouse, it may be at risk when you decide to start your own business, says Tiaan Pretorius, manager for Seeff Centurion.

 

With the increased number of people looking to start their own business, it is prudent to investigate whether your property will be at risk. You may for example want to consider purchasing it in the name of a company which provides relative protection, especially for small business owners, says Pretorius.

 

South African Law recognises two types of “persons”, being natural and juristic and you can purchase property as either, he says. Natural persons are ordinary human beings who act and conduct business in their own name. Juristic persons are legal entities such as a company, close corporation or trust.

 

Purchasing a property as a natural person

Most people will purchase property in their own name or jointly with a legal spouse, partner or another person or persons and these transactions are usually quite straightforward, says Pretorius.

 

The property will be registered in your own, or joint names depending on how it is purchased. You will also need to pay transfer duty on the purchase price as set down by SARS, the first R1 million being exempt. Additional costs will apply such as bond registration, conveyancing and other incidentals. When you decide to sell it, Capital Gains Tax (CGT) will be payable on the profit made above R2 million in the case of your primary residence.

 

The downside, says Pretorius, is that should you decide to run your own business, or encounter financial difficulty, your home could be at risk. If you are thinking of your own business, you should consider whether a legal entity might be a better option.

 

 

 

Purchasing property as a juristic person

Purchasing as a juristic person is, however, more complex and costly, but does offer a level of protection of the asset, adds Gerhard van der Linde, managing director for Seeff Pretoria East.

Read: 6 Practical steps to consider when investing in property 

 

There are three juristic options, namely purchasing as a company, close corporation or a trust. Given the legal complexities, tax and cost implications, you should start with legal advice. The legal entity will also need to be registered.

 

Purchasing as a (Pty) Ltd company will attract transfer duty at the same rate as a natural person, except if the seller is registered for VAT and the property forms part of the operations for which the seller is registered in which event VAT would be payable.

 

A company must comply with certain regulations such as annual audits, payment of annual tax and would potentially pay comparably more CGT on the profit of sale. Van der Linde says that when you purchase a property which is already in the name of a company, there would simply be a transfer of shares and not the property and hence there would be no transfer duty. You can, however, purchase a property which is in the name of a company and then register it in your own name, he adds.

 

The benefit of a company is that it can accommodate up to 50 shareholders including private individuals, trusts and companies which makes it preferential for investment property or extensive property holdings. Since it is a separate legal entity, there is some protection afforded to shareholder’s assets which can only be attached to cover debts incurred by the company if the individual has stood surety for the company.

 

Although close corporations are being phased out, existing close corporations are able to continue until deregistered, dissolved or converted into a private company. Close corporations attract the same transfer duty, CGT and tax and regulatory obligations as companies.

 

A trust is more complex and generally used where property needs to be held in a trust to the benefit of beneficiaries. A Trust Deed will be drawn up and appoint a trustee/s who will administer the affairs of the trust for the benefit of the beneficiaries.

 

The trust offers protection of the assets against creditors of the beneficiaries as well as exemption from estate duties and executor fees in the event of the death of the owner of the trust. The downside is that it attracts CGT on the sale of property. The founder may also not have control over the property since the trust will be the legal owner of the property and the trustees will have the power to administer it. Banks are also less likely to grant a full bond to a trust and there might be higher deposit requirements.

Read: Pros and cons to each type of property ownership