Developing entrepreneurship is key to achieving the rural poverty reduction goals in South Africa. The concern that social grants, which benefit millions of the poor, may inhibit the growth of entrepreneurship among rural households should be empirically investigated. This study assess the extent to which dependency on social grants influences the development of agricultural entrepreneurship among rural farming households. The study adopts the competency approach in understanding agricultural entrepreneurship, as this approach is readily applicable to firms that are smaller in size and dominated by the entrepreneur such as smallholder farming units. A total of 513 rural farming households were randomly selected in three purposively chosen districts of KwaZulu-Natal. The data were analyzed using the factor score regression method, which was estimated in two steps. The first step involved generating the agricultural entrepreneurship index using principal component analysis, while the second step involved using the computed agricultural entrepreneurship index as a dependent variable in a linear regression. The empirical results indicated that dependency on social grants, in line with the disincentive hypothesis, was negatively associated with agricultural entrepreneurship. This suggests that social grants are spilling-over to unintended groups, creating disincentive effects which inhibit entrepreneurial development among the rural farming households. The study results further indicated that the household's risk-bearing ability through asset endowment (land size, livestock size), access to government support services (extension, credit and training), and institutional and/or infrastructural support (tenure security, market access and irrigation access) had positive effects on agricultural entrepreneurship. The disincentives effects of social grants on entrepreneurship have negative implications on the government's drive to increase production and commercialization levels of smallholder farmers. Given that the entrepreneurial competencies can be learned and changed, the study identified a number of policy variables to enhance agricultural entrepreneurship. In particular, the study recommends that policy-makers should prioritize increasing the risk-bearing abilities of households as well as access to government support services to increase agricultural entrepreneurship.