In South Africa, many people earn a living by running their own businesses. Some register their businesses officially with the government, while others operate informally without registration. These two types of business – formal and informal – both play a role in the economy. Formal businesses follow regulations set by bodies like the Companies and Intellectual Property Commission (CIPC) and the South African Revenue Service (SARS). Informal businesses, on the other hand, often operate on a smaller scale without legal registration or tax compliance. Each option has its benefits and challenges, depending on the business goals and the level of growth a person wants.
Key Takeaways
- Legal Structure Differences: Formal businesses are legally registered and comply with tax and labour laws, while informal businesses operate without official registration or regulation.
- Steps to Formalisation: Moving from informal to formal requires CIPC registration, SARS tax compliance, a business bank account, and adherence to labour laws, with support available from agencies like SEDA and SEFA.
- Economic Impact: Formal businesses help drive job creation, strengthen tax revenue, and improve market confidence through better transparency and access to financial services.
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What Is Formal Business?
A formal business in South Africa refers to any enterprise that operates within the legal and regulatory framework set by the government. These businesses are properly registered, usually with the Companies and Intellectual Property Commission (CIPC), and are expected to comply with tax obligations through the South African Revenue Service (SARS).
Formal businesses typically employ staff under fixed terms, which means employees have clear contracts, standard working hours, and consistent monthly salaries. These businesses are required to contribute to tax, unemployment insurance, and other statutory payments. This ensures that both the business and its workers are part of the formal economy.
The formal sector includes a wide range of entities such as private companies, public corporations, and other legally recognised organisations. These businesses are structured in a way that allows for proper accountability and oversight. They are also required to meet all legal, financial, and employment standards as laid out by various government departments and regulatory bodies. Being part of the formal sector gives businesses legal protection and access to broader markets and financial services.
What Are Informal Businesses?
Informal businesses are common across South Africa and are easy to spot, especially in busy areas where people trade goods or offer services without being officially registered.
In South Africa, there are various kinds of businesses that operate outside the formal system. While any business that is not registered with authorities can be considered informal, there are specific types that are widely recognised as part of the informal economy.
Typical examples of informal businesses in South Africa include:
- Spaza shops, often run from residential properties
- Street vendors, including hawkers and pavement traders
- Home-based services, such as laundromats and backyard mechanics
These types of businesses are mostly found in informal settlements and rural areas. They usually operate on a cash-only basis, have no formal employment contracts, and are not registered with the Companies and Intellectual Property Commission (CIPC) or the South African Revenue Service (SARS).
The informal sector is a major part of the South African economy. It contributes roughly 18% to the country’s Gross Domestic Product (GDP) and supports the livelihoods of more than three million people. The government views the informal sector as a valuable source of jobs, especially in low-income areas, and recognises its role in helping to reduce unemployment.
Differences Between the Formal and Informal Sector
| Aspect | Formal Sector | Informal Sector |
|---|---|---|
| Benefits | Access to regulated benefits such as medical aid, paid leave, retirement contributions, and legal labour protection. | Typically no access to paid leave, medical cover, or pension contributions; businesses are usually not legally registered. |
| Salary | Higher and more stable wages that meet or exceed minimum wage requirements due to compliance with labour laws. | Generally lower and inconsistent wages; not bound by wage laws and often operate with limited capital. |
| Job Security | Greater stability with legal contracts, structured working hours, leave entitlements, and worker protection under labour regulations. | Minimal job security; often no contracts or fixed hours; employers may dismiss without notice and are not bound by labour rights. |
| Tax | Businesses must pay income tax, VAT, UIF, and may qualify for SARS incentives or deductions. | Not registered with SARS, so no formal tax payments, but also ineligible for government tax benefits or support. |
| Trade Unions | Employees can legally join or form trade unions to collectively bargain for better wages and conditions, as protected by employment law. | Workers rarely have union representation; lack of formal agreements makes collective bargaining difficult or impossible. |
Transitioning from Informal to Formal Business in South Africa
Business Registration with CIPC
To formalise your business, the first step is to register with the Companies and Intellectual Property Commission (CIPC). This process can be completed online through the CIPC website or via the BizPortal, which offers a streamlined registration process.
Tax Registration with SARS
Once your business is registered with the CIPC, it will automatically be assigned a Company Income Tax (CIT) reference number by the South African Revenue Service (SARS). To manage your tax affairs, you should register for SARS eFiling, which allows you to submit tax returns and make payments online.
Opening a Business Bank Account
Having a separate bank account for your business is essential for financial management. Most South African banks offer business banking services. To open an account, you’ll typically need your company registration documents, tax number, and proof of address.
Compliance with Labour Laws and Regulations
As a formal business, you must comply with South African labour laws. This includes adhering to the Basic Conditions of Employment Act, which outlines minimum wage requirements, working hours, and leave entitlements. Additionally, you may need to register for the Unemployment Insurance Fund (UIF) and Pay-As-You-Earn (PAYE) tax if you have employees.
Support Mechanisms
Government Initiatives
- Small Enterprise Development Agency (SEDA): SEDA provides non-financial support to small businesses, including training, mentorship, and business advice. Their services are designed to help entrepreneurs start, build, and grow their businesses.
- Small Enterprise Finance Agency (SEFA): SEFA offers financial assistance to small, medium, and micro-enterprises (SMMEs) through loans and credit facilities. They also run programmes like the Township and Rural Entrepreneurship Programme (TREP), which supports businesses in underserved areas.
Non-Governmental Organisations
Various NGOs in South Africa offer support to entrepreneurs, including training programmes, mentorship, and access to resources. These organisations often focus on empowering specific groups, such as women and youth, to start and grow their businesses.
Access to Microfinance Institutions
Microfinance institutions provide small loans to entrepreneurs who may not qualify for traditional bank financing. These loans can be used for various business purposes, such as purchasing equipment or expanding operations. Accessing microfinance can be a stepping stone for informal businesses looking to formalise and grow.
Challenges Faced During Formalisation
Transitioning from informal to formal business operations in South Africa is not always straightforward. Many entrepreneurs face specific difficulties that can delay or discourage the process.
High Costs of Compliance and Registration
Formalising a business often comes with expenses such as CIPC registration fees, licensing, and the cost of meeting legal standards. For small-scale operators with limited funds, these costs can be a major barrier, especially when professional help is needed to complete the process correctly.
Limited Knowledge of Legal Processes
Many informal business owners are unfamiliar with the legal steps involved in registration, tax compliance, and labour requirements. This lack of information can result in delays, mistakes, or a complete avoidance of formalisation due to confusion or fear of penalties.
Language Barriers and Administrative Challenges
Official processes are typically in English, which may not be the first language of all entrepreneurs. Without clear guidance or support with documentation, completing forms and understanding requirements can become frustrating and time-consuming.
Fear of Losing Customers or Flexibility
Informal businesses often benefit from low overheads and flexible operations. Formalising could lead to increased prices, less flexibility, and concerns about scaring off loyal customers. Many fear that compliance may interfere with how they currently run their business day-to-day.
Impact of Formalisation on Employment and Economic Growth
Job Creation
Formal businesses are more likely to expand and hire additional staff, contributing to employment growth. According to the State of the Nation Address 2025, the number of South Africans in employment increased from 8 million in 1994 to over 16.7 million now. This growth is partly attributed to the formalisation of businesses, which enables them to access broader markets and financial services, thereby facilitating expansion and job creation.
Economic Stability
Increased tax revenues from formal businesses can fund public services and infrastructure, promoting overall economic development. Formal businesses contribute to the tax base, allowing the government to invest in essential services such as education, healthcare, and infrastructure. This investment, in turn, supports economic stability and growth.
Market Confidence
A robust formal sector can attract investment and foster consumer trust, enhancing market dynamics. Formal businesses are subject to regulations and standards that ensure quality and reliability, which can increase consumer confidence. Additionally, investors are more likely to invest in formal businesses due to their transparency and compliance with legal requirements.
Conclusion
Understanding the differences between formal and informal businesses in South Africa helps entrepreneurs make practical decisions about how to operate and grow. While informal businesses offer flexibility and lower entry barriers, formal businesses provide greater legal protection, access to funding, and long-term stability. Formalisation also contributes to the broader economy through job creation and tax revenue. For many small business owners, making the shift from informal to formal can open up new opportunities, especially with the help of available government and NGO support.
Frequently Asked Questions
What is the main difference between formal and informal businesses?
A formal business is properly registered with government bodies such as the CIPC and complies with tax, labour, and financial regulations. In contrast, an informal business operates outside of official channels and does not follow the same legal or tax requirements.
Do I need to register my business with SARS if I already registered with the CIPC?
Yes. Registering with the CIPC is the first step, but you also need to register your business with SARS to receive a tax reference number and meet your tax obligations as a business owner.
Can I get funding if my business is informal?
It is generally difficult to access funding from banks or financial institutions if your business is informal. Most lenders and government funding programmes require businesses to be formally registered before considering any loan or financial support.
What are the benefits of becoming a formal business?
Formal businesses enjoy several advantages, including legal recognition, better access to credit and finance, eligibility for public contracts and tenders, and the ability to provide employment benefits to staff. These factors can support long-term growth and stability.
Where can I get help to formalise my business?
Support is available through agencies like SEDA and SEFA, which offer advice, training, and sometimes financial assistance. There are also NGOs and local organisations that provide mentorship and guidance to help informal businesses become compliant and registered.
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