Topic 2

• Different types of Business Entities

  • Sole Trader - A person trading in his/her own name
  • Companies
  • Close Corporations
  • Partnerships
  • Business trusts
• Applicable Law for Business Entities

  • Companies are regulated by the Companies Act of 2008 and common law
  • Close Corporation is regulated by the Close Corporations Act and common law
  • Partnership is regulated by the law of contract and common law
  • Business trust is regulated by the Trust Property Control Act
• Legal Personality


  Humans have legal personality, meaning they have rights and reciprocal duties, can enter into transactions, own property, get married, sue someone, or be sued
• Business Entities with Legal Personality

  • Company
  • Close Corporation
• Business Entities without Legal Personality

  • Partnership
  • Business trust
• Control of Business Entities

  • Companies are managed and controlled by the directors
  • Partnerships are controlled by the partnership agreement
  • Close Corporations are controlled by its members
  • Business trusts are controlled by the trustees
• Rights of parties: Governing Document

  • The Memorandum of Incorporation of a company determines the rights of different classes of shareholders
  • Association agreement of the Close Corporation determines the rights of the members
  • The partnership agreement determines the rights of the partners
  • The trust deed determines the powers of trustees and the rights of beneficiaries
• Perpetual Succession

  • A Company allows for perpetual succession
  • A Close Corporation also allows for perpetual succession
  • A Partnership does not enjoy perpetual succession
  • A Business trust can provide for perpetual succession
• Personal Liability

  • A company enjoys limited liability
  • Members of a Close Corporation are generally not liable for the debts of the CC
  • Partners of a partnership are jointly and severally liable for the debts of the partnership
  • Beneficiaries of a trust cannot be held personally liable in respect of the trust debts
• Auditor and Accounting Officer

  • Certain private companies must have an auditor, where there is no auditor, the company must have an accounting officer
  • Public companies must have an auditor
  • Every Close Corporation must have an accounting officer
  • Partnerships are not required to have an auditor or accounting officer unless provided for in the partnership agreement
• Duties in respect of the Business Entity

  • Shareholders of companies do not owe any duties to a company
  • Members of a Close Corporation owe a fiduciary duty to the Close Corporation
  • Partners in a partnership have a fiduciary relationship to each other and must act honestly
  • Beneficiaries of a trust do not owe the trust a fiduciary duty
  • Trustees must comply with their legislative and common law duties
• COMPANIES WILL BE THE FOCUS OF THE BUSINESS ENTERPRISE COURSE!
• Legal personality and Juristic personality of the Company


  A company is a separate legal person
• Beneficiaries of a trust do not owe the trust a fiduciary duty to the trust or other beneficiaries
• Trustees must comply with their legislative and common law duties
• Companies will be the focus of the business enterprise course
• Legal personality of a company


  A company is a separate legal person
• A wrong committed against a company does not amount to a wrong committed against the company’s shareholder(s)
• Section 19(1)(c) of the Companies Act of 2008 states that from the date and time of incorporation, the company is a juristic person
• Implications of separate legal personality include limited liability for shareholders, assets belonging to the company, and the company seeking redress for wrongs committed against it
• In Salomon v Salomon and Co Ltd, Aaron Salomon incorporated his business and became the principal shareholder and creditor
• Salomon v Salomon and Co Ltd: House of Lords judgment overturned the High Court ruling, stating the company was a legal entity separate from its shareholders
• Salomon v Salomon and Co Ltd: House of Lords judgment emphasized that the company is a different legal person from its shareholders, and shareholders are not liable beyond what is provided by the law
• Salomon v Salomon and Co Ltd: Unsecured creditors lost out completely as the company was unable to pay and Mr. Salomon was not personally liable
• In Dadoo Ltd v Krugersdorp Municipal Council, "Asiatics" were prohibited from owning immovable property, but laws said nothing about companies owned by them
• In Dadoo Ltd v Krugersdorp Municipal Council, the company of Dadoo Ltd was registered with share capital owned by "Asiatics"
• Share capital consisted of 150 shares, 149 owned by Mahomed Dadoo, one by Dindar. Both were “Asiatics”
• Innes CJ (at 550): '“Taking the intention then [of the legislature] to be the prohibition of ownership of fixed property by Asiatics and the prohibition of the acquisition and the occupation of mining rights by coloured people, I come to inquire whether the transaction complained of is a contravention of the statutes. In other words, whether ownership by Dadoo Ltd, is in substance ownership by its Asiatic shareholders.”'
• Innes CJ (at 550) contd: '“Clearly in law it is not. A company is a legal persona distinct from the members who compose it. … Nor is the position affected by the circumstance that a controlling interest in the concern may be held by a single member. This conception of the existence of a company as a separate entity distinct from its shareholders is no merely artificial and technical thing. It is a matter of substance; property vested in the company is not, and cannot be, regarded as vested in all or any of its members.”'
• We now understand the concept of separate legal personality
• What if the company is used as a device to perpetrate fraud?
• The concept of separate legal personality must not be abused
• A court may, in certain exceptional circumstances, ‘pierce’ or ‘lift’ the corporate veil
• The piercing or lifting is to enable the directors and/or members to be held personally liable for the debts of the company
• ‘Piercing the corporate veil’ refers to those exceptional circumstances where the court ignores the separate legal existence of the company and treats the shareholders as if they were the owners of the assets and had conducted the business of the company in their personal capacities OR attributes certain rights or obligations of the shareholders to the company
• Lifting or Piercing The Corporate Veil can be done either in terms of the Common Law or Section 20(9) of the Companies Act
• A court will pierce the veil where a company is misused in order to perpetrate fraud, or for a dishonest or improper purpose
• The court will pierce the veil where a company is used as a device to cover up or disguise fraudulent or illegal conduct
• The court will pierce the veil where a director and/or shareholder treats the company’s assets as his or her own
• The court will pierce the veil where a statute empowers the court to ignore corporate legal personality