South African Business Ownership

• The text describes different forms of business ownership in South Africa

Forms of Ownership Characteristics

• Formation Procedure: Some businesses must register, others don't need a formal procedure
• More procedures mean higher costs to establish the business
• Legal Persona: Registered businesses are separate legal entities
• A legal person can enter contracts and be sued
• Registered businesses have continuity of existence, independent of the owner
• Owner's Liability: Depends on legal persona
• If registered, the business is responsible for its own debts, giving the owner limited liability
• If not registered, the owner has unlimited liability, and personal belongings can be used to pay business debts
• Tax Implications: If the business is a legal entity, it pays income tax (28% in 2014/2015)
• If not, the owner pays tax in their personal capacity, using a progressive tax system
• Higher income leads to a higher tax percentage
• Management and Control: If not registered as a legal entity, the law doesn't specify management
• If registered, the law sets demands for management
• Capital Requirements: Depend on the size and nature of the business

Income Tax Rates (Individuals, 2014/2015)

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

Sole Trader

• A business owned by one person, not registered as a separate legal entity
• One person provides the capital and receives all the profit/risk

Sole Trader Characteristics

• Formation Procedures: No legal requirements
• Quick and low cost
• Legal Persona: The owner is the legal entity
• The owner conducts business in their own name and carries all the risks
• Continuity of Existence: No continuity of existence
• Owner's Liability: Unlimited liability
• Tax Implications: Depends on profit.
• Below R272 701, the owner pays a maximum of 25% tax
• Above R272 701, the owner will be taxed at a higher rate than the company tax rate (28%)
• Capital Requirements: If the business doesn't need much capital and the owner can raise it, it's not an issue
• If more capital is needed, the owner should consider another form of ownership
• Management and Control: Usually handled by the owner

Sole Trader Advantages

• The owner can make quick decisions
• Flexibility to capitalize on opportunities
• Can learn about aspects of business

Sole Trader Disadvantages

• No bouncing off ideas
• The owner may manages the business alone

Partnership

• A business where two or more people are joint owners
• They share capital, profits, and losses using a ratio
• The business is not registered as a separate legal entity

Partnership Characteristics

• Formation Procedures: No legal requirements.
• A writtem agreement is not mandatory
• Legal Persona: The owners are the legal entities
• Continuity of Existence: No continuity of existence
• A new agreement is needed if a partner dies, retires, or a new one joins
• Owner's Liability: Partners have unlimited liability
• They are jointly and severally liable for the business's debts
• Tax Implications: Depends on profit.
• If the profit is below R272 701 per annum, owners pay a maximum rate of 25%
• If the net profit exceeds R272 701, the owners will be taxed at a higher rate than 28%
• Capital Requirements: Possible to raise more capital
• More people can contribute
• Management and Control: Good employees can be retained if given part ownership
• Can have better the quality of decision making

Partnership - Advantages

• Synergy through skills and knowledge
• Division of labor is possible

Partnership - Disadvantages

• If there is no partnership agreement in writing, it may complicate issues if there is a disagreement
• More people have to be consulted when a decision is made

Partnership agreement

• There has to be a partnership agreement to establish the partnership
• The partnership agreement defines the the terms and conditions agreed upon, and may be entered into:
• Tacitly (by implication)
• Verbally
• In writing (always put details in writing)

Companies

• Defined as a legal entity incorporated in terms of Act 71 of 2008
• This includes companies registered under the previous Companies Act (61 of 1973) and Close Corporations
• Companies are registered with CIPC (Companies and Intellectual Property Commission)

Purpose of the Companies Act:

• Encourage entrepreneurship and promote participation
• Promote well-being of the South African economy
• Simplify registering and managing a company
• Align rights/obligations of shareholders
• Ensure effective non-profit companies with accountability

Types of Companies

• State-owned company
• Private company
• Public company
• Personal liability company
• Non-profit company
• Private companies can't be state-owned. Their Memorandum of Incorporation (MOI) must state that their shares not be offered to the public and not freely transferable
• Public companies can list on the JSE and offer shares to the public

Naming prescriptions of the Companies Act

• A company can reserve a name if it's not too similar to an existing one
• The name cannot be hateful to a group
• The name cannot falsely associate with any person or misleadingly associate with government
• Names must end in certain letters:
• Proprietary Limited ((Pty) Ltd.) for private companies
• Limited (Ltd.) for public companies
• Incorporated (Inc.) personal liability companies
• SOC Ltd. for state-owned companies
• NPC for not-for-profit companies

Company Formation Procedure

• Pay the required fee
• Complete a Notice of Incorporation
• Register a Memorandum of Incorporation (MOI)

Memorandum of Incorporation (MOI)

• The founding document to start a company
• Stipulates share types and shareholder rights
• Describes directors' duties and responsibilities
• The MOI may impose stricter requirements on directors
• The minimum number of shareholders for Private and Public Companies is one.
• A public company must have at least three directors
• A private company needs at least one director
• All shareholders in a private may be directors

Prospectus Requirements:

• All directors must sign and date the prospectus
• The prospectus must contain company information, business type, history, issued shares, and past three years' financial data (turnover, profit/loss).
• The prospectus must indicate King Report and Code compliance
• The prospectus is a written invitation to the public to buy shares
  • The public company will issue a prospectus as it may offer shares to the public
  • The front page must note its registration
• If issuing to raise capital for property, transaction details needed
• The purchase and address of the price
• How much is paid in cash and how the rest of the purchase price will be defrayed
• How much is paid for customer goodwill if a business is being taken over

Meetings

• Shareholders can attend in person, electronically, or via proxy
• Public companies required to provide 15 business days' notice
• Private companies have to give 10 business days' notice
• A quorum of 25% of voting shares is required

Duties of Directors

• Directors subject to Common law principles
• Directors must act in the company's best interests in a fiduciary duty
• Directors must be skilled and diligent
• Directors must disclose personal or financial interests

Financial Obligations

• All companies prepare annual financial statements (AFS) that meet IFRS
• AFS is required to be filed with CIPC
• Public companies audit their AFS
• Private companies do not have to have AFS audited

Requirements for Public Companies

• Appoint a company secretary:
  • Make the directors aware of relevant legislation
  • Give guidance to directors where needed,
  • Ensure minutes are recorded according to the correct procedures
  • Ensure that all required documents are filed with CIPC.
• Appoint an internal audit committee
• Appoint an external auditor
• Solvency and liquidity tests must be met before dividends or share buybacks
• Ensure assets exceed liabilities
• Ensure financial capacity to settle debts within 12 months

Company - Advantages

• The business is a legal entity
• Can be any sized business
• Separation of management and ownership

Company - Disadvantages

• Quite complicated and involved, with cost aspects
• Managed by directors
• If it is a small company, the owners will be the directors as well

Comparing Forms of Ownership

• With a need for one shareholder, there's no reason to have unlimited liability when running a sole trader or partnership
• Companies have a cost factor to establish
• A private company could be from 4500 ZAR upwards to ensure the correct procedures are followed and all necessary documents are completed
• If a business is small and has tax at a lower rate than 28%, it may be better to have a sole trader