The biggest mistake new business owners make

Case Study

Case Study

The excitement of starting a new business with a great idea is capturing, motivating and inspiring. Finance was obtained and you are ready to go! Once the first sales order is processed, success is around the corner. Your vision is quickly becoming a reality in your head, and as your bank balance increases, your #enthusiasm and #dedication rises as well.

It is time to appoint an accountant to comply to laws and regulations as well as pay the receiver what is due. This will also enable you to devote #undividedattention to the day-to-day running of your business – that what makes you who you are.

After submitting your fourth set of financial statements to SARS, you get a letter with a notification that an audit is due for the current year, as well as the re-opening of previous assessments as there is a suspicion of accounting discrepancies.

After contacting your accountant, you realise that different accounting staff members worked on your profile and accounting treatment of revenue was inconsistent. It led to material #errors and the understatement of revenue and output VAT. Accounting records must be reprocessed and tax documents need to be resubmitted.

Your new accountant notified you that annual returns were also not submitted to CIPC as well as certain employees that joined the company during a later stage were not registered as employees at the Department of Labour. The annual return of earnings were also not submitted to the compensation fund for the last two years. He also informed you that the previous accountant was not appointed as an #accountingofficer at CIPC.

Everything is a mess, and you are pulling your hair out of your head. The penalties and interest payable to SARS as well as the additional #administrativeburden cost you dearly, whereas you cannot tender for the next couple of projects as you don’t have a tax clearance certificate.

Quick, personal, and always thinking ahead

Epagelia Investments

Client

Case Study

It often happens that a business owner entrusts the accounting and reporting function to an external accountant based on a service agreement between the two parties.

However, small business owners often act as directors of a company. In terms of the Companies Act, directors must act in good faith in the best interest of the company, with a degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions and having the general knowledge, skill and experience of that director (Companies Act, s76).

It is the legal entity’s responsibility to pay the outstanding taxes, which is governed by the director. Directors are responsible to ensure the compliance to all regulations and applicable laws that are relevant to the company. It is also the director’s responsibility to ensure that accurate accounting records are kept.

As the Company acts as an employer with employees, Labour law immediately applies and The Basic Conditions of the Employment Act of 1997 applies to the business. In the event where the new employees were injured on the job, compensation for the injuries could not be claimed as new employees are not even registered as employees at the Department of labour (the act as casual labourers). This would have a massive impact on the business. In the event of injury, it is possible that the Occupational Health and Safety Act 85 of 1993 has also been infringed, therefore directors might be held liable in their personal capacity.

Recommendation

So, what was the biggest mistake here? Many #entrepreneurs (and large organisations) fail to take #ownership of their entire business. Certain functions and roles are entrusted to the accountant and other third parties; however, one should realise that accountability cannot be delegated.

S22(1) of the Companies Act state that directors and prescribed officers of companies can be held liable in their personal capacity in the event where a company carries on a business in a reckless manner.

Definition of #reckless – Lack of proper caution, careless of consequences, marked by lack of attention or consideration or forethought or thoroughness.

As a business owner and a director of a company, you should obtain an understanding and a general knowledge of all relevant laws and regulations that are applicable to your business. This includes obtaining a basic knowledge and insight of finance and accounting principles, taxation law as well as other requirements affecting your business.

Don’t drop the ball before scoring the try.

Spend time to consider what set of laws govern the organisation and examine the basic principles and requirements of each of them. This will enhance the discussion topics you have with your accountant into meaningful and relevant subjects. It will also assist you in determining whether your accountant’s fees are reasonable (see Blog – 5 Things to consider in finding the perfect accountant).

At K-Fin Accounting Services, we assist entrepreneurs in determining the applicable laws that govern their business. We inform, update and educate as we believe it is important to have an oversight of the game being played on the field. It is impossible to win without adhering to the rules.

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