The #1 Reason Small Businesses Fail (and how you can avoid it)
Starting a business is exciting – you get to be your own boss, pursue your dreams, and hopefully, make a difference in the world.
But here’s the deal: if you ignore or mishandle your taxes, it could quickly become a nightmare.
In fact, tax compliance is one of the biggest reasons why small businesses fail. It’s not just about paying taxes—it’s about following the rules, filing the right forms, and staying on the good side of the South African Revenue Service (SARS).
If you don’t, your business could face fines, penalties, and even closure.
Don’t worry though – in this guide, we’ll walk you through the key tax requirements for small businesses in South Africa, common mistakes to avoid, and online services that can make it all a lot easier.
The Big Reason Most Small Businesses Fail: Tax Compliance
When most small businesses fail, it's often because they didn’t handle their taxes properly.
Many entrepreneurs focus on sales, marketing, and making money, but overlook the importance of tax compliance.
What exactly is tax compliance?
It’s making sure that your business is registered with SARS, paying the correct taxes, and submitting your tax returns on time.
If you don’t keep up with these requirements, your business could face some serious consequences:
- SARS can slap you with hefty fines if you don’t submit your taxes properly.
- Late submissions or payments can lead to additional charges and penalties.
- In extreme cases, SARS can even shut down your business if you’re not compliant.
Ignoring tax compliance won’t just cost you money—it could cost you your entire business.
Why Tax Compliance Matters for Small Businesses in South Africa
In South Africa, small businesses play a big role in the economy.
They create jobs, introduce new ideas, and help communities grow. But for these businesses to succeed, especially in a tough economic climate, they need to follow the rules—starting with taxes.
Tax compliance isn’t just about paying what you owe to SARS. It helps you:
- Build Credibility – if your business is tax-compliant, it shows clients, suppliers, and potential partners that you’re trustworthy.
- Compete for Contracts – if you want to do business with big companies or the government, you’ll need a Tax Compliance Certificate.
- Avoid Unnecessary Costs – staying compliant means avoiding penalties and fines that can eat into your profits.
For young entrepreneurs and small business owners, it’s important to remember that tax compliance can help you grow your business in the long run.
Breaking Down Tax Compliance for Small Businesses
Now that we’ve covered why tax compliance is important, let’s break down the key tax obligations you’ll need to keep track of.
1. Personal Income Tax (For Sole Proprietors and Partnerships)
If you’re running a small business as a sole proprietor (meaning you haven’t registered your business as a company), your business income will be taxed as part of your personal income.
This means you’ll need to file an income tax return that includes both your personal and business earnings.
The same goes for partnerships. Each partner’s share of the profits is taxed under their personal income tax.
So, make sure to keep track of all business income and expenses because it will affect your personal tax bill.
2. Corporate Income Tax (For Registered Companies)
If you’ve registered your business as a company, things work a bit differently. Your business will need to pay corporate income tax, which is currently set at 28%.
The key thing to remember is that companies are treated as separate entities from their owners, which means the business itself needs to file tax returns and pay its own taxes.
Plus, if your business grows and starts earning more, you may also need to register for additional taxes, like VAT (Value Added Tax).
3. Value-Added Tax (VAT)
VAT is a tax that businesses charge on the goods and services they sell.
In South Africa, VAT is set at 15%. If your business earns more than R1 million a year, you MUST register for VAT with SARS.
If your turnover is less than R1 million, you can choose to register voluntarily. While registering for VAT can increase your administrative workload, it can also allow you to claim VAT back on business expenses.
This can help improve your cash flow, especially if you’re dealing with large expenses.
4. Pay As You Earn (PAYE) and Skills Development Levy (SDL)
If your business has employees, there are a couple of other taxes you need to think about.
First is PAYE, which is a tax you deduct from your employees' salaries and pay to SARS on their behalf.
Second is the Skills Development Levy (SDL), which is 1% of your total payroll.
This money is used by the government to fund skills development and training programs in South Africa.
As a business owner, you’re responsible for making sure these payments are made correctly and on time. Failing to do so can result in penalties, and it can also affect employee morale if they find out taxes aren’t being handled properly.
5. Provisional Tax
If your business doesn’t have a steady income throughout the year (like freelancers or contract workers), you may need to pay provisional tax.
Provisional tax helps businesses spread out their tax payments over the year, rather than paying a huge lump sum at the end.
Provisional tax is typically paid twice a year, and it’s based on the expected earnings for the year. This helps SARS ensure they’re getting their taxes throughout the year, and it helps you avoid the shock of a big tax bill all at once.
Common Tax Mistakes Small Businesses Make
Even with the best intentions, many small businesses make mistakes when it comes to tax compliance.
Here are some common pitfalls and how to avoid them:
1. Missing Deadlines
It’s easy to lose track of tax deadlines, but doing so can lead to penalties. Make sure to keep a calendar or use accounting software to track when taxes are due.
2. Not Registering for the Right Taxes
Some businesses forget to register for VAT or PAYE when they should. Make sure you understand which taxes apply to your business and register early.
3. Misclassifying Business Expenses
Incorrectly categorising expenses can cause issues when filing tax returns. Keep detailed records of every expense and consult a tax advisor if you’re unsure.
4. Ignoring Provisional Tax
If your business is irregular in its income, ignoring provisional tax can lead to big problems at the end of the year. Pay in advance to avoid getting stuck with a large tax bill.
Tax Incentives to Help Your Small Business Succeed
The good news? There are several tax incentives available to help small businesses stay afloat, reduce their tax burdens, and keep growing.
1. Turnover Tax
Turnover tax is designed for small businesses that make less than R1 million a year. Instead of paying multiple taxes like VAT, income tax, and capital gains tax, you only pay one simplified tax based on your total turnover.
This makes life much easier for small business owners, as it reduces the amount of paperwork and tax filings you need to handle.
2. Small Business Corporation (SBC) Tax
If your business qualifies as a Small Business Corporation (SBC), you can benefit from lower tax rates.
For example, businesses with taxable incomes of less than R87,300 don’t pay any tax at all. And for incomes up to R550,000, there are reduced tax rates that can save you a lot of money.
To qualify, your business needs to meet certain criteria, such as having an annual turnover of less than R20 million and not being owned by another company.
3. Employment Tax Incentive (ETI)
If you’re hiring young workers (ages 18 to 29), you can benefit from the Employment Tax Incentive (ETI).
This incentive allows you to reduce the amount of PAYE you have to pay, which helps lower your overall tax bill. It’s a great way to support job creation while also lightening your tax burden.
The Cost of Non-Compliance
Not staying compliant with your tax obligations doesn’t just cost you in fines and penalties—it can hurt your business in other ways, too.
1. Damaged Reputation
If clients or potential partners find out that your business isn’t tax-compliant, it could damage your reputation and make them hesitant to work with you.
2. Missed Opportunities
Without a valid Tax Compliance Certificate, you won’t be able to bid on tenders or sign contracts with government departments or large companies. This could limit your business growth.
3. Cash Flow Issues
If you’re hit with unexpected fines or tax bills, it can disrupt your cash flow and make it harder to cover your day-to-day expenses.
How Govchain Can Help
If all this sounds like a lot to handle, you’re not alone. That’s where Govchain comes in. Govchain offers services that simplify business registration and tax compliance and can help you:
Register Your Business
Whether you’re just starting out or need to register with the CIPC, Govchain can make the process quick and easy.
Register for Taxes
Need help with VAT, PAYE, or corporate income tax registration? Govchain has you covered
Stay Compliant
Govchain helps you manage your tax compliance, so you can focus on running your business instead of worrying about paperwork.
Ready to get started? Check out Govchain’s online services designed to help small business owners start, run & grow – without a hassle!