Chapter Four

Business Entities
Introduction

 There are a number business entities available to a person or

persons in the Republic of South Africa.
 Each have their own:
 characteristics,
 advantages, and
 disadvantages.
Examples of business entities are:

a. sole proprietorship,
b. partnership,
c. close corporation,
d. company, and
e. trust.
sole proprietorship

 is a business entity run and operated by an individual. for

example, a vendor.
characteristics
 owner – gets all the profits.
 owner – carries the entire risk attached to the business.
 no distinction between his/her assets and the assets of the business.
 liabilities of the business are also personal liabilities.
 the income of the business is taxed on the scale applicable to
natural persons – 18%
 has no separate legal personality.
advantages of sole
proprietorship
a. costs of establishment are low.
b. few legal formalities required to be complied with. For
example, business name in terms of Business Names Act, and
permit – renewable annually.
c. tax filings are easy.
d. can easily be terminated.
e. has less statutory audit requirements.
disadvantages of sole
proprietorship
a. owner carries the entire risk.
b. debts and liabilities of the business are also personal debts and
liabilities of the owner.
c. owner’s liabilities are unlimited.
d. owner can lose personal assets in the event of insolvency of the
business.
e. death of the owner brings the business to an end.
Partnership

 is an association of two or more persons (2 – 20), who are

contractually bound to one another to operate a joint business
with the primary objective of making profit.
 Each partner should contribute either money, goods, labour,
services or a combination.
 Profits made are shared between partners.
characteristics of a partnership

a. objective is to make profit.

b. contractual relationship is established either verbally or in
writing. (Partnership agreement)
c. does not have separate legal personality.
d. change of membership terminates the partnership. For example
death or another joining or leaving.
e. upon dissolution, assets of the partnership are liquidated.
advantages of a partnership

a. less statutory audit requirements.

b. not liable for tax.
c. partners pay income tax in their individual capacities on the
scale applicable to natural persons – 18%.
disadvantages of a partnership

a. no limited liability. In other words, if the business goes down so

do the partners.
b. no perpetual succession – it ends with death, departure or
retirement of a partner/s.
c. risk of unauthorised contracts – any partner can conclude a
contract which binds the partnership.
d. limitation on a number of partners – may not have more than
20 partners.
types of partnerships

ORDINARY partnership
 partners are liable jointly and severally for the debts of the
partnership.
 all partners are known to the general public.
 all are liable for the debts of the partnership equally.
 partners share profits equally.
ANONYMOUS (sleeping) partnership
 is not known to the general public.
 is liable to his/her partners only for his pro-rata share of the
debts.
types of partnerships cont…

3. Commanditarian partnership
- a commanditarian partner is purely a financial participant.
 unknown to the general public.
 however, his liability is restricted to his/her specific contribution.
duties of partners

a. to make contribution i.e. money, labour, goods or service;

b. to share profits and losses;
c. to conduct business diligently; and
d. to act in a bona fide (good faith) manner.
termination of a partnership

a. agreement between partners.

b. conclusion of a business transaction.
c. membership change.
d. court order (if deemed just and fair).
e. illegality or impossibility of the objective.
Close Corporation

 is a business entity established in terms of the Close Corporations

Act No. 69 of 1984.
 Close Corporations were created to permit a simple, cheap and
flexible type of business entity.
 One to ten members could form a CC.
 A Close Corporation enjoyed separate legal personality.
 Consequently, the Companies Act No. 71 of 2008, stipulates that
no person can form a CC effective from 1st May 2011.
registration of close corporation

 Members should formulate a founding statement. (What

information should be contained in the founding statement?)
 Founding statement must submitted and registered with the
Companies and Intellectual Property Commission (CIPC).
characteristics of CCs

a. enjoys perpetual succession.

b. change in membership does not affect its continued existence.
c. members have members’ interest expressed in the form of
percentages amounting up to100%.
characteristics of CCs cont.

d. all members of the CC must be natural persons.

e. trusts and companies cannot be a member of a CC.
f. each member has equal rights to manage and represent the CC.
g. CCs may render financial assistance to members to acquire
members’ interest.
h. CCs are taxed on the scale applicable to companies – 28%.
i. distribution of profits is tax free at the hands of members.
advantages of Close
Corporations
a. easy to maintain.
b. can accommodate multiple owners – maximum 10 .
c. no statutory audit requirements exist.
d. simpler than companies in that there is no separation between
ownership and management.
disadvantages of Close
Corporations
a. every member is an agent of the CC and can act on its behalf
and therefore, create risks for other members.
b. limited number of owners – maximum 10.
termination of Close
Corporations
a. de-registration by CIPC; and
b. winding-up by the Court.
future of CCs under Companies
Act, 2008
a. continue to exist indefinitely; and
b. treated as private companies.
Company

 Generally, is an association formed with the primary purpose of

carrying on a business.
Characteristics of a company
a. it is an organised structure.
b. functions are divided between directors and shareholders.
c. directors are responsible for day-to-day running of the
company.
d. shareholders provide share capital and can exercise control of
the company through annual general meetings.
characteristics cont.

e. has separate legal personality.

f. assets of the company belong to the company itself.
g. on liquidation or winding-up, shareholders are entitled to share
assets. (if any residue – left).
h. debts of the company are its own and cannot be recovered from
directors and/or shareholders.
characteristics cont.

i. profits belong to the company.

j. shareholders become entitled to the profits when dividends are
declared.
k. a shareholder cannot enter into a commercial agreement(s) on
behalf of the company.
l. only a director(s) appointed as representative(s) can bind or
enter into a commercial agreement(s) on behalf of the company.
types of companies

a. Profit companies are either a:

 public with suffix Limited or Ltd,
 private with suffix Proprietary Limited or (Pty) Ltd
 personal liability with suffix Incorporated or Inc.
b. Non-profit company with suffix “NPC”.
c. State-owned company is either a:
 national,
 provincial and
 local governments with suffix “SOC Ltd”.
d. External company – a company which has operations in South Africa. i.e.
Coca-Cola, Anglo-American etc.
Categories of profit companies

profit company
 is a company formed for purposes of financial gain.
formation of a profit company
 may be formed by one or more persons.
 number of persons not restricted.
private company

 is a profit company that is not a public, personal liability or state-

owned company.
characteristics of a private company
Its MoI:
a. prohibits offering shares to the general public.
b. restricts transferability of shares.
personal liability company

 is a special type of private company for persons in certain

professions.
 for example:
 attorneys, doctors;
 architects (land surveyors),
 engineers etc.
 the reason is that the legislature wished to protect the clients of
these professionals against negligence.
characteristics of a personal liability company
 its MoI must state that it is a personal liability company.
state-owned company

 is an enterprise listed as a public entity in either Schedule 2 or 3

of the Public Finance Management Act No. 1 of 1999.
OR
 an enterprise owned by a municipality as contemplated in the
Local Government: Municipal Systems Act 32 of 2000.
pre-requisites of state-owned company, must appoint:
a. a company secretary;
b. an audit committee;
c. an auditor; and
d. social and ethics committee.
public company

 is a company that is not a state-owned company, a private

company or a personal liability company.
characteristics of a public company
a. shares may be offered to the general public.
b. no restriction on the transferability of shares unless prohibited
by its MoI.
characteristics cont…

c. have greater obligations to the public.

d. can raise their share capital from the public – public invitation.
(i.e. Sasol – inzalo, Mnet – Phuthuma Nathi)
e. a public company must appoint a company secretary; an audit
committee; an independent auditor; a social and ethics
committee.
f. have it’s annual financial statements audited.
g. a public company is obliged to convene an annual general
meeting of its shareholders.
non-profit company

 is a company incorporated for public; cultural or social benefit.

Characteristics of non-profit company
 upon dissolution, no director will be entitled to any asset(s) of the
company.
 upon dissolution, the entire assets will be distributed to one or
more NPCs within the Republic.
characteristics cont…

 NPCs not subject to audit requirements.

 NPCs not required to appoint:
 an auditor,
 a company secretary or
 an audit committee.
Companies’ Office - CIPC

 is an independent organ of state with expanded powers and

functions.
 it is established by Chapter 8 of the Companies Act No. 71 of
2008.
 It has replaced the now defunct Companies and Intellectual
Property and Registration Office (CIPRO).
functions of CIPC

a. register companies;
b. promote education about companies,
c. raise awareness of companies and intellectual property law;
d. promote compliance with the Companies Act;
e. monitor compliance with the Companies Act;
f. report, conduct research for & advise the Minister of Trade &
Industry on matters of national policy relating to company &
intellectual property law.
Every company in operation must
be registered with the following:

a. receiver of revenue (sars).

b. department of labour.
c. compensation commissioner (cc).
d. unemployment insurance fund (uif).
Documents lodged for
registration of a company
a. power of attorney #
b. director’s name and surname appointed to represent the
company.
c. MoI – sets out rights, duties, & powers of shareholders &
directors within the company.
d. notice of incorporation.
e. prescribed fee.
f. auditor’s certificate.
g. solvency certificate.
duties of directors

a. act with reasonable care;

b. act in good faith; and
c. act with skill and diligence.
liability of directors

director(s) may be held liable for:

a. acting in the name of the company without authority;
b. signing financial statement(s) that are false or misleading in
material; and
c. issuing a prospectus containing untrue statement(s).
resolutions

two types of resolutions:

a. ordinary resolution – means a decision taken at a shareholders
meeting with the support of 51% of the voting rights.
b. special resolution – a decision taken by shareholders at a
meeting by at least 75% of the voting rights.
Conversion of a public company into
private company (or vice versa)

a. the company must amend its MoI.

b. MoI must prohibit offering shares to the public.
c. MoI must restrict the transferability of shares.
d. the company’s name must be amended from Limited into
Proprietary Limited.
trust

 is a business entity wherein,

 trustee(s) use trust asset(s) (i.e. farm; house),
 to conduct business,
 for the sole benefit of the beneficiary or beneficiaries.
formation of the trust:
 a will (mortis causa) or
 by means of a contract (inter vivos).
characteristics of a trust

a. have separate legal personality.

b. only trust assets can be attached to satisfy trust debts.
c. is created by a trust deed signed by the founder and the
trustee(s).
d. trust deed must be lodged and registered with the Master of
High Court.