Understanding Shareholding Rules for Small Business Corporations (SBCs) in South Africa: A Comprehensive Guide for Entrepreneurs

At HAS Accounting & Tax, we often work with entrepreneurs who are building multiple businesses and want to maximise tax benefits under South Africa’s Small Business Corporation (SBC) regime. One area that causes considerable confusion—and can be the difference between qualifying for significant tax relief or losing it entirely—is the rules around shareholding. This article explains these rules in detail, why they exist, and how business owners can structure their ownership to comply with the law while keeping SBC status intact.

1. What is a Small Business Corporation (SBC)?

Before diving into shareholding rules, it’s important to understand what an SBC is.

A Small Business Corporation (SBC) is a legal entity (usually a private company) that qualifies for preferential tax treatment under Section 12E of the Income Tax Act. SBCs benefit from:

• Reduced corporate tax rates compared to standard companies.

• Simplified tax compliance requirements for small businesses.

• Special deductions for small business expenses.

Key eligibility criteria include:

• Turnover limit: The company’s gross income must not exceed a certain threshold (currently R20 million per annum).

• Shareholders: Must be natural persons (we’ll explore this in detail below).

• No shareholding in other companies (with exceptions).

These benefits make SBC status extremely valuable for startups and growing businesses.

2. Why Shareholding Rules Are Important

SARS (South African Revenue Service) strictly enforces shareholding rules to prevent abuse of the SBC regime. The law is clear:

“All the holders of shares or members, as appropriate, of a qualifying entity must, at all times during the relevant year of assessment, be natural persons. No part of the share capital or members’ interest may be held by a juristic person such as another company.”

In simpler terms:

• Direct ownership by natural persons is required.

• Holding shares through another company or trust without proper beneficial rights is not allowed.

• Even a single day of contravention disqualifies the SBC for that year.

The rationale is to ensure that SBC tax benefits are used by small business owners personally, not through corporate or trust structures designed to artificially reduce tax.

3. The “No Shares in Other Companies” Rule

Section 12E also stipulates that:

“The holders of shares in, or members of, the qualifying entity may not at any time during the particular year of assessment hold any shares or have any interest in the equity of any other company, except in those companies specifically permitted.”

This rule often confuses entrepreneurs. Let’s unpack it:

• Purpose: Prevent “income splitting” between multiple companies. A shareholder shouldn’t create multiple SBCs to multiply tax benefits artificially.

• Permitted exceptions include:

  • Listed companies (like Naspers or Sasol).

  • Collective investment schemes (unit trusts, ETFs).

  • Share block companies.

  • Sectional title bodies corporate.

  • Certain non-profit associations (companies incorporated under Section 21 of the Companies Act).

Any other private company that is not listed or on this permitted list is considered a “non-permitted company” for SBC purposes.

4. What Causes Disqualification Through Shareholders

Even if a company meets all other SBC criteria, shareholding missteps can disqualify it. Here’s what entrepreneurs need to know:

4.1 Direct vs Indirect Ownership

• Direct ownership by natural persons: ✅ SBC status maintained.

• Ownership through a company (HoldCo): ❌ SBC status lost.

• Ownership through a trust: ✅ SBC status maintained only if the trust’s beneficiaries are natural persons with vested rights throughout the year.

Example:

• A company where all shares are directly held by natural persons qualifies as an SBC.

• If ownership is transferred to a holding company (HoldCo), SBC status is lost because the shares are held by a juristic person.

4.2 Shareholders Holding Shares in Other Companies

This is where many entrepreneurs get confused:

Scenario:

• A shareholder personally owns 50% of Company A (OpCo1) and 50% of Company B (OpCo2).

• Both companies are separate legal entities, with separate employees, contracts, and revenue streams.

Analysis:

• Technically, the shareholder owns shares in more than one company.

• SARS’ literal wording could seem to disqualify them.

• In practice: If each company operates independently and the ownership is direct, both OpCos can qualify as SBCs. The law’s intent is to prevent income splitting, not multiple legitimate businesses owned by the same person.

Key point: Document separate operations to show each company is independent. This mitigates potential challenges from SARS.

4.3 Shareholders Holding Shares in Non-Permitted Companies

Non-permitted companies are any private companies not listed or falling under the permitted exceptions.

Example of disqualifying scenario:

• A shareholder owns 50% of Company A (SBC).

• The same shareholder also personally owns 10% of another private company that is not listed or permitted.

• Even if Company A and Company B are independent SBCs, SARS could disqualify Company A for that year because of shareholding in the non-permitted company.

5. Practical Recommendations for Entrepreneurs

5.1 Direct Ownership is Crucial

• Ensure all SBC shares are directly held by natural persons.

• Avoid transferring shares to a HoldCo or company if SBC benefits are important.

5.2. Separate Operations for Multiple Companies

• If owning multiple OpCos directly, keep them operationally independent.

• Document employees, contracts, accounting, and revenue for each company.

5.3 Be Careful with Trusts

• Only allowed if beneficiaries are natural persons with vested rights.

• Trustees themselves do not count as beneficial owners.

5.4 Avoid Non-Permitted Companies

• Do not hold shares personally in other private companies that are not on the permitted list.

• If investing elsewhere, stick to listed companies, share blocks, or permitted non-profits.

5.5 Plan for Growth

• Once businesses are larger and SBC benefits are less critical, a HoldCo can be created for centralised management.

• At that point, SBC status may no longer be needed, so the risk of disqualification is irrelevant.

6. Common Misconceptions

Misconception	Reality
Owning multiple SBCs automatically disqualifies them	No, as long as ownership is direct and operations are independent
Trust ownership always disqualifies SBCs	Only if beneficiaries do not have vested rights
Moving shares to a HoldCo keeps SBC benefits	❌ SBCs lose status because a juristic person now holds the shares

7. Key Takeaways

• Direct ownership by natural persons is the single most important factor for SBC eligibility.

• Holding shares in non-permitted companies can disqualify your SBC.

• Multiple OpCos can qualify as SBCs if owned directly, independent, and not violating income splitting rules.

• Careful planning and documentation are essential to withstand any SARS scrutiny.

8. Conclusion

Understanding shareholder requirements for SBCs is crucial for entrepreneurs building multiple businesses. The rules exist to ensure tax benefits go to genuine small business owners, not to structures designed to avoid tax.

Entrepreneurs should:

• Directly own their OpCos as natural persons.

• Keep operations separate.

• Avoid holding shares in non-permitted companies.

• Document operations carefully.

Following these principles will allow small business owners to maximise tax benefits legally, while building multiple companies safely, and leave flexibility for restructuring later as the business grows.

At HAS Accounting & Tax, we help business owners navigate these rules, structure their companies for maximum tax efficiency, and ensure compliance with SARS. Understanding SBC shareholding rules is essential for protecting your business and saving on taxes.