Sole proprietor or company? Tax compared at different profit levels for 2026/27
Many owners assume a company saves tax. On 2026/27 rates it only does when profit stays in the company. If you take all the profit out, a sole proprietor pays less tax at every profit level we tested.
In short
- A company's lower tax rate applies only to profit that stays in the company. Paying it out triggers dividends tax of 20%.
- At profits from R300,000 to R2 million, a company that pays out all its profit as dividends pays more total tax than a sole proprietor.
- A company can still make sense for limited liability, credibility and reinvesting profit, but not for tax if you draw everything.
- A mix of salary and dividends can beat both, so model your own numbers before you decide.
The comparison
We compare two ways of running the same business with the same profit before tax, using 2026/27 rates and the following assumptions.
- Sole proprietor: profit is taxed at personal rates for a person under 65, less the R17,820 rebate. No other deductions or credits.
- Company (small business corporation, SBC): profit is taxed at SBC rates. When the after-tax profit is paid out as a dividend, dividends tax of 20% is withheld.
- The company qualifies as an SBC: all shareholders are natural persons, gross income is below R20 million, and it is not a personal service company or a holding company.
| Profit before tax | Sole proprietor | Company, retained | Company, all paid out as dividends |
|---|---|---|---|
| R300,000 | R40,572 | R14,070 | R71,256 |
| R600,000 | R132,907 | R70,970 | R176,776 |
| R1,000,000 | R288,293 | R178,970 | R343,176 |
| R1,500,000 | R493,293 | R313,970 | R551,176 |
| R2,000,000 | R703,149 | R448,970 | R759,176 |
Read the last two columns together. The company tax is much lower, but the moment you pay the profit out, dividends tax on the whole after-tax amount pushes the total above the sole proprietor's tax at every level in the table.
Why this happens
Two layers of tax apply to a company that distributes its profit. First the company pays SBC tax. Then you pay dividends tax of 20% on what is left. At R1 million of profit, the company's tax is R178,970 and dividends tax on the remaining R821,030 is R164,206, for a total of R343,176. A sole proprietor with the same profit pays R288,293.
A company only wins on tax when you leave profit in it, for example to buy equipment, hold stock or pay down debt. Then the tax you pay is the lower company figure, and you pay dividends tax later, if at all.
What the table leaves out
- Salary. You can pay yourself a salary from the company. It is deductible to the company and taxed at personal rates, like a sole proprietor's profit. A mix of a salary and dividends, sized to use the lower personal brackets, can beat either column above. It needs a proper model.
- Personal service companies. These cannot use SBC rates, so they are taxed at the standard 27% and the picture changes.
- Other deductions and credits, such as retirement contributions and medical credits, which lower the sole proprietor's tax.
- Growth. A very large profit changes the crossover, because the top personal rate is 45%.
Reasons to have a company that are not about tax
- Limited liability. Business debts are generally the company's, not yours. This is a strong reason in industries with contract or professional risk.
- Credibility. Some customers, funders and tenders prefer a registered company.
- Ownership. It is easier to bring in a partner or investor.
- Costs. A company adds annual returns, financial statements and dividend tax admin.
What to do now
- Take last year's profit and the table above, and see where you sit.
- Ask how much of your profit you actually draw each year. If it is nearly all of it, the tax case for a company is weak.
- List your non-tax reasons for a company, such as liability or customers, and give them a value.
- Ask for a proper model that includes a salary and dividend mix, your other income and any deductions.
- Do not restructure in a hurry. Moving a going business into a company has tax consequences of its own, which we can walk through.
Frequently asked questions
Is a company always cheaper?
No. On 2026/27 rates it is cheaper only on profit you leave in the company.
What is dividends tax?
A tax of 20% on dividends, withheld by the company when it pays them to you and paid to SARS.
Does the tax residency or age of the owner matter?
Yes. The table uses the rates for a person under 65. Rates and rebates differ for older taxpayers.
Sources and further reading
- Budget 2026 Frequently Asked Questions (income tax brackets, rebates and small business corporation rates for 2026/27), South African Revenue Service
- Dividends Tax, South African Revenue Service
This article is general information for South African businesses. It is not tax, legal or financial advice, and it reflects the rules and figures at the date shown above. Tax rules change, so confirm the current position before you act. TBL's practitioners are registered tax practitioners.