Determine The Legal Structure Of Your Business – What type Of Company Are You Forming?
Which form of ownership is best for you? The type of legal structure you choose for your business will affect :
- your ability to raise finance
- how much you pay in taxes
- personal liability
- paperwork and record-keeping
It is wise to consult business experts so that you can fully understand the pros and cons before choosing the structure that is right for your current and future business. If you expand and bring partners on board, you need to have the structure which accommodates the needs of all concerned. A sole proprietorship is fine if you are going go work alone but what happens when you want to pass the business on to a family member or sell it?
The law sees a company in the same light as a natural person. A company is a legal entity which has the capacity and power to act on its own. South African regulations are governed by the new Companies Act No 71 of 2008 came into effect on 1 May 2011.
There are many factors, including tax implications, which affect different forms of business entity. You can register many different types of companies (private, public, non-profit) e.g. :
- Franchises : you register a private company.
- Church : you register a non-profit company.
- Private school : could be registered as a private company or non-profit company, depending on its objectives.
- An association of professionals such as lawyers, doctors, civil engineers etc. may be registered as a personal liability company.
Foreigners must apply for a business permit if they wish to invest in South Africa by establishing a business or by investing in an existing business in the country and are required to invest a prescribed amount of capital. They may also need to apply for residency permits with the Department of Home Affairs.
NPCs are created for companies which have public/communal/group interests and conduct social activities. Here, the primary goals are to benefit the public (helping people, lobbying for good causes, protecting the environment etc.) and not to make a profit. NPCs do not need to break-even in order keep aflot and make use of donations, grants and various fundraising activities. Examples of NPCs include :
- Art and cultural organisations
- Science programmes
- Recreational bodies
- They must be registered as NPCs with the Companies and Intellectual Property Commission (CIPC).
- All assets and income must be used to advance objectives, as set out in the Memorandum of Incorporation (MOI).
- Property and income may only be distributed to incorporators, members, directors or officers as reasonable compensation for services rendered by them.
- It must be incorporated by at least 3 people.
- A minimum of three directors must be appointed (unless the MOI indicates a higher minimum number).
- The appointment of an auditor and company secretary is optional.
It is required that a co-op contributes to the betterment of the community in which it operates and that it provides education and training to members to assist them in developing their skills. A co-operative is formed by people who get together to address common needs and each member has an equal opportunity to participate in making decisions. Each member has one vote. Any surplus is divided among members in relation to the amount of business they brought in. Before a co-op is registered, a “Formation Meeting” is held to identify the common goals, responsibilities and values as well as the products/services which will be available to members. Co-ops have been created by people operating in a variety of fields including financial services, agricultural, consumer, service in general, marketing, housing, crafts etc.
Primary co-ops : provide services and employment for one another and promote community development. There must be at least five founding members for this type of co-op to be registered.
Secondary co-ops : are formed by two or more people involved with similar activities who desire to promote their services in the sector which they serve.
Tertiary co-ops : are formed by secondary co-ops joining together to promote members interests to the private sector, government organisations or other interested parties.
Sole Proprietor (Inc.)
This is the simplest, most common and smallest type of business. It is run by one person who is the sole decision-maker and takes care of everything. This person gets to keep all profits. You do not need to hire anyone and you can work from home for your convenience and to save costs.
The downside is that you have to play many roles and sometimes the pressure can be over-whelming. Liabilities/ debts need to be paid using personal money if business funds have dried up. If you hire someone to help you, you will also be responsible for the debts they incur and cannot pay back. You cannot raise funds by selling shares in your business and banks may be reluctant to lend you money due to a perceived lack of credibility when it comes to repayments if the business is struggling. Furthermore, when you quit, so does the business unless you have made arrangements for someone to step into your shoes and trained them sufficiently to carry on in your place – in which case the work will need to continue in a different name than your own.
If you are a freelance artist, writer or musician, you are a sole proprietor. If you choose to work under a name different to your own, you may file a fictitious name (also known as an assumed name, trade name, or DBA name, short for “doing business as”). This name must be original and not registered to anyone else. Because you and the business are one and the same “entity”, you do not need to register a separate business, so income and expenses will be recorded in your annual personal returns.
Personal Liability Company (Incorporate – Inc.)
People create partnership businesses where the directors are jointly and severally liable, together with the company, for any debts and liabilities arising during their periods of office. At least one director must be appointed. However, the owner of the company is considered separate from the company so creditors cannot seize the owner’s personal assets. The individual, not the company, pays tax. It is only paid on the profits (salaries / bonuses) that are paid out to the members of the Personal Liability Company Inc. The Company itself does not pay taxes on its profits. This type is popular with professionals (accountants, engineers, doctors, lawyers).
Private Company (Pty)
This is the simplest and most common form to register and similar to a Close Corporation (CC) but CC’s no longer need to be registered. Private companies are owned and run by individuals in their private capacity.
They must have at least one director and one shareholder who can be the same person. There is no limit to the number of directors which may be appointed. Most private companies are owner managed and tend to have just a few directors. Provided all requirements are met (e.g. all directors are also the only shareholders of the company), annual audits are not required. A private company has separate business accounts to the people who run it which means you need to submit personal and business annual returns. Private Companies cannot offer shares to the public and restrictions are placed on the transferability of their shares.
The main advantage of having a private company is that if the business fails, the business and not the owners becomes bankrupt, although the shareholders may lose the money they put into it (limited liability). The size of companies can range from anything from a SME’s (small and medium enterprises), which are companies that employ up to 50 (small) or 200 (medium) people, to larger companies with more staff.
A public company is a company that may offer its shares to the public and be listed on the Johannesburg Stock Exchange, but is restricted in its right to make pre-emptive share offers. Public companies include those owned and run by the government for the benefit of the people it serves.
- Public companies must have at least three directors.
- They must produce audited financial statements which are tabled with their shareholders annually.
- Depending on its size, the company may also need to have an Audit Committee and a Social and Ethics Committee.
- A foreign company is incorporated outside South Africa, irrespective of whether it is a profit or non-profit company or carrying on business in South Africa.
- A foreign company is not permitted to offer securities to the South African public unless it follows the specific provisions of the Companies Act, 2008, relating to offers to the public.
- A foreign company is required to register as an “external company” with the CIPC if it conducts or intends to conduct business in South Africa.
Section 23 of the Companies Act, 2008, lists a series of activities which are regarded as conducting business. This list includes :
- Holding a meeting(s) of shareholders or board of the foreign company, or otherwise conducting the internal affairs of the company
- Establishing/maintaining bank or other financial accounts
- Establishing/maintaining offices or agencies for the transfer, exchange or registration of the foreign company’s own securities
- Creating /acquiring property debts, mortgages, or security interests
- Acquiring any interest in intellectual property
- Entering into employment contracts
Business Licences And Permits
If your business is involved in activities supervised and regulated by a government agency – such as selling alcohol, tobacco, firearms, commercial fishing, wildlife, public road/sea/air transportation, mining, radio/TV broadcasting, etc. – then you will need to obtain the relevant license or permit.