South African Business Ownership & Tax

• This document covers forms of business ownership including sole proprietorships, partnerships, and companies, with specific focus on South African regulations and tax implications

Forms of Ownership Characteristics

• Formation procedure: Some businesses must be registered, which can be costly
• Legal persona: Registration creates a separate legal entity that can enter contracts and be sued
• Continuity of existence: Registered businesses continue independently of the owner.
• Owner's liability: Separate legal entities protect owners from the business's debts.
• Tax implications: Businesses pay income tax; owners pay personal income tax, which is progressive in South Africa.
• Management and control: Unregistered businesses have no legal management requirements.
• Capital requirements: Dependent on the business's size and nature.

Income Tax Rates (2014/2015, Individuals)

• 0-174 550 R: 18% of taxable income
• 174 551-272 700 R: 31 419 + 25% of the amount above 174 550
• 272 701-377 450 R: 55 957 + 30% of the amount above 272 700
• 377 451-528 000 R: 87 382 + 35% of the amount above 377 450
• 528 001-673 100 R: 140 074 + 38% of the amount above 528 000
• 673 101 R and above: 195 212 + 40% of the amount above 673 100

Sole Trade

• Definition: A business owned by one person, not registered as a separate legal entity
• The owner provides all capital, receives all profit, and carries all risks.

Sole Trade: Characteristics, Advantages, and Disadvantages

• Formation Procedures: Advantage is that it has no legal requirements, making it quick and low cost
• Legal Persona: Disadvantage is that the owner is the legal entity, carrying all risks
• Continuity of Existence: Disadvantage is that the business lacks continuity; it ends with the owner.
• Owner's Liability for Debts: Disadvantage is that the owner has unlimited liability.
• Tax Implications: Depends on profit; advantageous if profit is below R272 701 (lower tax rate than companies), but disadvantageous if profit exceeds this amount.
• Capital Requirements: Problematic if the business needs more capital than the owner can provide.
• Management and Control Aspects: Advantage is the owner can make quick decisions
• Management and Control Aspects: Disadvantage is the lack of diverse input, potentially leading to poorer decision-making

Partnership

• Definition: A business owned jointly by two or more people, sharing capital, profits, and losses with a predtermined ratio
• The business is not registered as a separate legal entity

Partnership: Characteristics, Advantages, and Disadvantages

• Formation Procedures: Advantage is that it has minimal legal requirements
• Formation Procedures: Disadvantage is that disagreements in the absence of a written agreement may complicate issues legally
• Legal Persona: The disadvantage is that the owners are the legal entities who enter contracts in their own name and carry all the risks.
• Continuity of Existence: Disadvantage is that the business lacks continuity; a new agreement is needed if a partner changes.
• Owner's Liability for Debts: Owners have unlimited and joint/several liability.
• Tax Implications: Similar to sole proprietorships; potentially disadvantageous if profit exceeds R272,701
• Capital Requirements: Advantage is it is possible to raise more capital because there are more people who can contribute capital
• Management and Control Aspects: Good employees may be retained if ownership is offered
• Management and Control Aspects: Decision quality may be better due to diverse input, synergy, and potential division of labor
• Management and Control Aspects: Disadvantage is the slower decision-making due to the need to consult more people

Partnership Agreement

• A partnership agreement should be established to define the terms and conditions
• It can be tacit, verbal, or written, and it is always safer to write it down

Companies

• Definition: A legal entity incorporated under Act 71 of 2008, including entities registered under previous acts or close corporations

Purpose of the Companies Act

• Encourages entrepreneurship, promotes overall well-being in South Africa, simplifies registration/management, aligns shareholder/director rights, ensures responsible company management, and ensures effective/accountable non-profit companies

Types of Companies

• State-owned companies
• Private companies
• Profit companies
• Non-profit companies
• Personal liability companies
• Public companies

Private company specifics

• Private companies may not be state owned
• Its Memorandum of Incorporation (MOI) must restrict public share offerings and ensure shares are not freely transferable.

Public company specifics

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

Company Name Regulations (Act No. 71)

• The name can be reserved if it's not too similar to existing names
• The name cannot be hateful or undesirable
• The name cannot falsely suggest association with businesses or government
• The name must end with specific words or letters like Proprietary Limited, Limited, Incorporated, SOC Ltd., or NPC depending on the company type.

Procedures for Company Formation

• Pay required fees and complete/register a Notice of Incorporation and Memorandum of Incorporation (MOI).
• MOI stipulates share types, shareholder rights/duties, director duties/liabilities, and potentially stricter director requirements than the Companies Act
• The MOI can be changed by a special resolution accepted by shareholders
• Minimum one shareholder is required for private/public companies
• Public companies need at least three directors, while private companies need at least one director
• When the Registration Certificate is issued, the company becomes a legal entity

Prospectus

• A prospectus is a written invitation for the public to buy shares or securities in the company
• Private companies do not issue prospectus, and it may not offer shares to the general public
• Prospectuses must include a note indicating that it has been registered

Prospectus Details

• Signatures of all directors, signatures must be dated
• To include general information about the company
• The prospectus has to include a statement indicating the extent to which it complies with the King Comittee report and Code and if it is not complying with certain issues, the prospectus has to contain an explanation of why it does not comply.
• If they raise capital to buy specific property or business venture
• details contained within the transaction

Shareholder meetings

• Shareholders can attend meetings personally, electronically, or via proxy
• Public companies must give 15 days' notice while private companies give 10 days' notice
• Quorum requirement: 25% of shares with voting rights must be in attendance

Duties of Directors

• Directors must adhere to Common Law principles and special requirements
• Duty to act in the company's best interests, preventing self-benefit to the company's disadvantage
• Directors must act in good faith with reasonable skill and diligence
• Obligation to disclose personal/financial interests to prevent conflicts

Company Financial Obligations

• All companies must prepare annual financial statements (AFS) compliant with IFRS and file with CIPC (the Companies and Intellectual Property Commission)
• Public companies must have AFS audited

Additional Public Company Requirements

• Appoint a company secretary for legal guidance and proper documentation
• Appoint an internal audit committee
• Have an external auditor
• Companies must meet solvency and liquidity tests before declaring dividends or buying back shares

Factors to consider when opening a company

• Both private and public companies need a minimum of one shareholder
• Cost is a factor, establishing a private company could be costly
• With a small business the owner can choose a sole trader, and pay a lower tax rate

Advantages and Disadvantages of Sole Trade

• Definition: owned and managed by one person.
• Advantages: easy to establish, full control, simpler taxes, owner keeps all profits.
• Disadvantages: unlimited liability, limited capital, demanding workload, difficulty attracting employees.

Advantages and Disadvantages of Partnership

• Definition: two or more individuals agree to share in the profits or losses of a business.
• Advantages: more capital is available, shared management and workload, simpler taxes.
• Disadvantages: unlimited liability (partners are jointly and individually liable for the debt), potential for disagreements, profits are shared.

Advantages and Disadvantages of Company

• Definition: separate legal entity distinct from its owners (shareholders).
• Advantages: limited liability, easier to raise capital, continuous existence, specialized management.
• Disadvantages: more complex to establish, separate taxes, financial reporting requirements, potential loss of control.