Forms of Ownership

• Formation procedure


  • According to South African law, some businesses have to be registered, while others do not require a formal formation procedure
  • The more procedures to follow to establish the business, the more costly it becomes
• Legal persona


  • If the law requires the business to be registered, it means the business becomes a separate legal person from the owner
  • The legal person (either the owner in some forms of ownership or the business in others), enters into contracts, will sue or be sued if the contractual stipulations are not adhered to
• Continuity


  • If the business was registered as a legal persona, it will automatically have continuity of existence
  • The business exists as an entity and functions independently of the owner. Therefore, if the owner dies or there is a change in ownership, the business is not affected
• Liability for debts


  • If the business was registered as a separate legal entity, it is responsible for its own debt and the owner cannot be held liable for any debt of the business. This means the owner has limited liability and his/her personal belongings cannot be used to repay the debt of the business
  • If the business was never registered as a separate legal entity, the owner would have entered into business contracts in his/her own name and will, therefore, be liable for the debts of the business, i.e. unlimited liability. This means the owner's personal belongings may be used to pay for the debt of the business
• Tax implications


  • If it is the business that is the legal entity, the business will be liable to pay the income tax at a fixed rate of 28%
  • If the business was not registered as a separate legal entity, the owner will be held liable for tax in his/her personal capacity. In South Africa we have a progressive tax system. That means that the higher the income, the higher the percentage of the tax rate
• Management and control aspects

  • If the business is not registered as a separate legal persona, the law does not specify who has to manage the business
  • If the business is registered, the law makes certain demands in terms of one person and/or whatever number of people involved with the management of the business
• Capital requirements


  • Will be determined based-on-size and nature of the business
  • A small business rendering a service would probably need less capital than a large business involved in manufacturing
• Sole trader


  • A business that is started and owned by ONE person and that person does not register the business as a separate legal entity
  • It does not mean that there is only one person working there, but that one person has given all the capital (or borrowed it) and that one person gets all the profit (and carries all the risk)
• Sole trader


  • No legal requirements - quick and low cost formation procedure
  • The owner is the legal entity and has to enter into a contract in his/her own name. This means the owner carries all the risks
  • The business has no continuity of existence
  • The owner has unlimited liability
  • Tax implications depend on the profit generated by the business. If the profit is below R205 900 per annum, the owner will pay tax at a minimum rate of 18% on profits and this is below the rate charged to companies (28%). If the net profit exceeds R321 601 the owner will be taxed at a rate higher than 28% and then it becomes a disadvantage
  • If the business does not require a large amount of capital and the owner is capable of raising all capital in his/her personal capacity, it is not a problem. If the business needs more capital than what the owner can contribute, the owner will have to consider a different form of ownership
  • The owner can make quick decisions and this affords him/her flexibility to capitalize on possible opportunities. Although the owner may not initially have a lot of business experience, soon he/she will learn about all the different business functions. Bouncing off ideas or discussion of problems will not occur, as the owner manages the business alone
• Partnership


  • A partnership is a business where two or more people become joint owners of the business
  • They will usually share capital contributions, profits and losses, using a predetermined ratio
  • The business is not registered as a legal entity separate from the owners
• Partnership


  • No legal requirements - quick and low cost formation procedure. A partnership agreement may be entered into in writing, but it is not a requirement according to the law
  • The owners are the legal entities and they enter into contracts in their own names. This means the owner carries all the risks
  • The business has no continuity of existence. If one of the partners dies, retires or if a new partner joins, a new partnership agreement has to be signed and this means (on paper at least) it is a new business
  • Partners have unlimited liability. In addition, they are also jointly and severally liable for the debt of the business. This means if one partner gets the business into debt; all partners are responsible in their personal capacities for the debt
  • Tax implications depend on the profit generated by the business. If the profit is below R205 900 per annum, the partners will pay tax at a minimum rate of 18% on profits and this is below the rate charged to companies (28%). If the net profit exceeds R321 601 the partners will be taxed at a rate higher than 28% and then it becomes a disadvantage
  • It is possible to raise more capital through a partnership as there are more people who can contribute capital to the business
  • A good employee may be retained if he/she is offered part ownership in the business. The quality of decision making may be better than in a sole trader, because there are a number of people to give input, i.e. synergy through the combination of skills and knowledge. Division of labour is a possibility, i.e. each partner can specialise in an aspect of the business where he/she has expertise
  • More people have to be consulted when a decision is made. This may mean slower decision making
• Partnership agreement


  In order to establish a partnership, there has to be a Partnership agreement. This agreement defines the terms and conditions agreed upon by the partners and may be entered into: tacitly (by implication), verbally, or in writing (always safer to put details in writing)
• Company


  • A company is defined as a legal entity incorporated in terms of Act 71 of 2008
  • This includes any company that was registered under the previous Companies Act (61 of 1973) and a Close Corporation (regardless of whether it has in the meanwhile been converted into a company)
  • A Company will be registered with the Companies and Intellectual Property Commission ("ClPC")
• Purpose of the Companies Act


  • To encourage entrepreneurship and thereby promote participation in different sectors of the South African economy
  • To promote the overall well-being of the South African economy
  • To simplify the process of registering and managing a company as a form of ownership
  • To ensure the rights and obligations of shareholders and directors are aligned with each other by ensuring companies are managed in a responsible manner
  • To ensure non-profit companies are established and managed in a manner that will make their functioning more effective, while ensuring accountability at the same time
• Different types of companies

  • Private companies
  • Public companies
• Private company


  May not be state owned and its Memorandum of Incorporation (MOl) has to specify that no shares will be offered to the public and shares are not freely negotiable or transferable
• Public company


  Will be allowed to list on the JSE and offer shares to the general public in order to raise capital
• Purpose of companies


  • To simplify the process of registering and managing a company as a form of ownership
  • To ensure the rights and obligations of shareholders and directors are aligned with each other by ensuring companies are managed in a responsible manner
  • To ensure non-profit companies are established and managed in a manner that will make their functioning more effective, while ensuring accountability at the same time
• Types of companies


  • State owned companies
  • Private companies
  • Public companies
  • Non-profit companies
• Registering a company


  1. Pay the required fee

  2. Complete a Notice of Incorporation

  3. Register a Memorandum of Incorporation (MOI)
• Memorandum of Incorporation (MOI)


  • The founding document to start a company
  • Stipulates different types of shares that will be sold and the associated rights, duties and responsibilities of the shareholders
  • Describes the duties, responsibilities and liabilities of directors
  • May impose stricter or more rigorous requirements on directors than what is described in the Companies Act, but may in no other way contravene the Act
  • May be changed by means of a Special Resolution accepted by shareholders
• The minimum number of shareholders for both Private and Public Companies is one
• A public company has to have at least three directors, while a private company has to have at least one director. It is possible for all shareholders in a private company to be directors at the same time
• As soon as the Registration Certificate is issued, the company becomes a legal entity (legal person, has legal persona)
• Prospectus


  A written invitation to the public to buy shares or other securities in the company. A private company will not issue a prospectus as it may not offer shares to the general public
• Requirements for a prospectus

  1. There has to be a note on the front page to indicate that it has been registered

  2. All directors have to sign the prospectus. Signatures must be dated

  3. The prospectus will contain general information on the company, the type of business, a bit of the history of the business (if applicable), shares already issued and financial information for the past three years (the turnover, profits/losses before and after tax, dividends paid etc)

  4. The prospectus has to include a statement indicating the extent to which it complies with the King Report and Code and if it is not complying with certain principles, the prospectus has to contain an explanation of why it does not comply

  5. If the prospectus is issued with the purpose of raising capital to buy a specific property or another business venture, the prospectus has to contain details of the transaction, i.e. the purchase price; the address of the property of business venture; how much is paid in cash and how the rest of the purchase price will be defrayed; if it is a business being taken over, how much is paid for customer goodwill
• Meetings


  1. Shareholders have the option to attend meetings in person, to attend the meeting by means of electronic media or to give someone a proxy (valid for one year) to attend the meeting on their behalf

  2. Public companies have to give 15 business days' notice of an upcoming meeting, while private companies have to give 10 business days' notice

  3. The requirement to have a minimum number for meetings is that 25% of shares with voting rights have to be in attendance
• Duties of directors


  • Directors have a fiduciary duty to act in the best interests of the company and may not act in a manner that will benefit themselves and disadvantage the business
  • Directors should also act in good faith displaying skill and diligence that may reasonably be expected of a person functioning as a Director
  • A Director is obliged to disclose personal or financial interests to prevent a conflict of interest if it may be construed that the Director, in order to benefit personally, acted to the disadvantage of the company
• Financial obligations


  1. All companies have to prepare annual financial statements (AFS) that meet the requirements of International Financial Reporting Standards (IFRS) and then file these with ClPC

  2. Public companies have to have their AFS audited, while private companies do not have this requirement, however they need to have an independent review done

  3. Public companies also have to appoint a company secretary, an internal audit committee and an external auditor

  4. The company has at all times to meet the solvency and liquidity tests before dividends can be declared or shares bought back
• Characteristics, advantages and disadvantages of companies

  • Formation procedures - Quite complicated and involved. Cost aspects to register the business
  • Legal persona - The business is the legal entity
  • Continuity of existence - The business has continuity of existing, independent of the life of the owners
  • Owner's liability for debts - Owners have limited liability and can therefore possibly only lose their capital investment if the business is insolvent
  • Tax implications - It depends on the profit generated by the business. If the profit is below R205 900 per annum, the owners will have paid tax at a minimum rate of 18% on profits and this is below the rate charged to companies (28%). If the net profit exceeds R321 601 the owners will have paid tax at a rate higher than 28% and then it would be an advantage for the company to pay a flat rate of 28% tax
  • Capital requirements - A company is a suitable form of ownership, regardless of the size of the business
  • Management and control aspects - The business is managed by Directors. If it is a small company, the owners will be the directors as well. As soon as the business is registered as a public company however, there has to be separation of ownership and management. People with expertise are then usually appointed as directors and the additional skills and experience will probably be to the advantage of the business
• There is no reason for anybody to take the risk of unlimited liability when running a sole trader or partnership, since both Private and Public companies need a minimum of one shareholder
• The one problem that may be encountered when establishing a company is that there is a cost factor. To establish a private company, including the services of someone who will ensure that the correct procedures are followed and the necessary documents are completed, can become expensive
• If it is a small business, the owner may choose to have a sole trader - especially if it would mean paying tax at a lower rate than the 28% for companies