Forms of Ownership in South Africa

Chapter 5: Forms of Ownership

• Formation procedure refers to whether a business needs to be registered according to South African law. More procedures increase costs.
• Legal persona means a business is a separate legal entity from the owner if registration is required.
• Continuity of existence refers to a business existing as an entity and functioning independently of the owner if registered as a legal persona.
• Owner's liability for debts is related to legal persona. Registered entities are responsible for their own debts, providing the owner with limited liability. Without registration, the owner has unlimited liability.
• Tax implications depend on whether the owner or the business is the legal entity. Businesses pay income tax at a fixed rate (28% in 2014/2015), while owners pay in their personal capacity based on a progressive tax system.
• Management and control aspects state that if unregistered, the law doesn't specify management. Registered businesses have legal demands for management.
• Capital requirements depend on the business's size and nature.

Sole trade

• A sole trade is a business owned and started by one person who does not register the business as a separate legal entity.
• The owner provides all the capital and receives all the profit.

Characteristics, Advantages and Disadvantages of Sole trade

• Formation procedures require no legal processes, making it quick and low cost.
• The owner is the legal entity and enters contracts in their own name.
• The business lacks continuity of existence.
• The owner has unlimited liability.
• Tax implications depend on the profit generated. Profits below R272,701 per annum are taxed at a maximum of 25%, which is less than the company rate of 28%.
• Capital requirements are a disadvantage if the business requires more capital than the owner can contribute.
• Management and control aspects allow the owner to make quick decisions and capitalize on opportunities.
• The owner can gain business experience, but may lack discussion of problems.

Partnership

• A partnership is a business owned jointly by two or more people.
• They typically share capital contributions, profits, and losses based on a predetermined ratio.
• The business is not registered as a separate legal entity.

Characteristics, Advantages and Disadvantages of Partnership

• Formation procedures require no legal processes, making it quick and low cost.
• An unwritten partnership agreement can complicate issues if disagreements need court settlement.
• The owners are the legal entities and enter contracts in their own names.
• The business lacks continuity of existence.
• Partners have unlimited liability, and are jointly and severally liable for the business's debt.
• Tax implications depend on joint profit generated between partners.
• It is possible to raise more capital through a partnership.
• Good employees can be retained with the offer of part ownership.
• Decision-making qualities may improve through synergy but may slow down due to the consultation required.

Partnership Agreement

• It defines terms and conditions agreed upon by partners and can be tacit, verbal, or written.

Companies

• A company is defined as a legal entity incorporated in terms of Act 71 of 2008.
• Includes companies registered under previous acts and close corporations.
• Registration occurs with the Companies and Intellectual Property Commission (CIPC).

Purpose of the Companies Act

• To encourage entrepreneurship and promote participation in different sectors of the South African economy
• To promote the overall well-being of the South African economy
• To simplify the process of registering and managing a company as a form of ownership
• To ensure rights and obligations of shareholders and directors are aligned.
• To ensure non-profit companies are managed effectively while ensuring accountability.

Types of Companies

• State-owned co

• Private co

• Profit companies

• Personal liability co

• Non-profit companies

• Public co

• Public companies can list on the JSE and offer shares to the public.

• Private companies cannot be state-owned and cannot offer shares to the public.

Prescriptions of the Companies Act No. 71 of 2008

• The name of a company cannot be the same or too similar to an existing business, undesirable, misleading, or falsely associated with government entities.
• The name of the company must end in certain letters or words, such as Proprietary Limited, Limited, Incorporated, SOC Ltd, or NPC.
• Formation procedure involves paying fees, completing a Notice of Incorporation, and registering a Memorandum of Incorporation (MOI).
• The MOI stipulates share types, shareholder responsibilities, and director duties, and can be altered by shareholder resolution.
• Minimum shareholders is one for Private and Pulic Companies
• Public companies need at least three directors.
• Once a Registration Certificate is issued, the company becomes a legal entity.

Prospectus

• A prospectus is a written invitation to buy shares/securities, not issued by private companies.

• The front page must indicate registration.

• All directors must sign and date it.

• It contains general company info, business type, history, share details, and financial data for three years.

• Should include compliance with the King Report, and if not, an explanation

• Prospectus specifies details for raising capital of a business transaction like: the purchase price, address, how much is paid with cash, and if it is taken over, the amount of goodwill.

• Shareholders can attend meetings in person, via electronic media, or by proxy.

• Public companies require 15 business days' notice for meetings, while private companies need 10.

• A quorum of 25% of voting shares is required for meetings.

• Directors are subject to Common law principles and have a fiduciary duty to act in the company's best interest.

• Directors must disclose conflicts of interest.

Financial obligations

• All companies must prepare annual financial statements (AFS) that meet IFRS and file them with CIPC.
• Public companies must have AFS audited, whereas private companies do not have this requirement.
• Public companies also appoint a company secretary, an internal audit committee, and an external auditor.
• The company must meet solvency and liquidity tests before dividends or buy backs.
• Solvency tests confirm assets exceed liabilities.
• Liquidity tests determine the ability to settle debts in the next 12 months.

Characteristics, Advantages and Disadvantages of Companies

• Formation Procedures are quite complicated, involved, and costly for registration.
• The business is the legal entity.
• The business has continuity of existing, independent of the life of the owners.
• Owners have limited liability and can therefore only lose their capital investment if the business is insolvent.
• Tax implications depend on the profit generated. If profit is below R272,701 per annum, the tax rate for an individual becomes advantageous because the business pays tax at 28%.
• A company is a suitable form of ownership, regardless of the size of the business.
• Management is handled by Directors.

Comparing Forms of Ownership

• Given that both private and public companies need at least one shareholder, taking on unlimited liability in a sole trader or partnership is illogical.
• Cost is a factor in establishing a company.
• Establishing a private company may cost R4,500 upwards.
• Owning a smaller business can reduce the payment of 28% of company tax.