Legal business entities
There are a number of forms in which persons may elect to carry on business or to invest in South Africa. The most important are:
individually as a sole proprietor;
jointly with others in partnership;
through a close corporation where only natural persons may be involved;
through a private or public company; and
by the registration of a juristic person incorporated outside South Africa as an “external company” in South Africa.
Investments and enterprises can also be carried on through a business trust. This involves the passing of ownership in assets to trustees who then hold those assets, as a separate estate distinct from their own personal estates, for the benefit of the beneficiaries. Trusts are often used to attain a form of limited liability without the formalities of incorporating a close corporation or company, and are also used for the purposes of protecting assets by separating the assets from those of the beneficiaries. Trusts can play an important role in estate planning for individuals.
Individual / Sole Proprietor
There are no additional formalities required where a person commences business as a sole proprietor. The business is not a separate legal person and all transactions are regarded as having been concluded by the person concerned. Accordingly, the sole proprietor does not enjoy limited liability.
Partnerships and Joint Ventures
In general a partnership may be formed between at least 2 and no more than 20 persons. This number may be increased with the permission of the relevant Minister. There are no formalities required to form a partnership and a partnership will exist if the following requirements are met:
two or more persons agree to act jointly to pursue a venture;
they each make a contribution (whether in money or otherwise);
the purpose of their venture is to make a profit;
and they divide that profit between them.
Although no formalities are required, it is usual for a written agreement to be concluded.
A distinction is often drawn between the term “partnership” and the term “joint venture”. Although joint venture agreements may contain a statement that they are not to be construed as a partnership, joint ventures generally meet all the requirements of a partnership and will, where appropriate, be treated as a form of partnership.
The term “joint venture” is usually used where the parties concerned intend to pursue a single venture only, for example, in the mining industry joint ventures are often formed for the purpose of prospecting for mineral deposits. If a viable deposit is found the exploitation of the minerals is thereafter carried out by a company in which the joint venture members become shareholders.
Partnerships do not generally offer limited liability and during the existence of the partnership the partners are normally jointly and severally liable for the debts and losses of the partnership. If a partnership is sequestrated, the individual estates of the partners are automatically and simultaneously sequestrated. However, should a partner give an undertaking to discharge the partnership debts and provide security for such discharge, the partner's private estate will not be sequestrated. Joint and several liability means that any one of the partners may be compelled to pay the whole of the debt. If a partner has paid more than its share of the debts, it has a right of recourse against the other partner(s) for the excess amount.
This form of business entity was introduced in 1984. It is intended to serve smaller businesses, extending limited liability and certain other advantages of corporate identity without requiring compliance with all the formalities of the Companies Act, 1973.
A close corporation exists as a separate legal entity from its members and has an unlimited lifespan. Normally only natural persons can be members of a close corporation and membership is restricted to ten members.
Legislation recognises the personal nature of the relationship between members of a close corporation. Thus the courts have extensive powers to regulate the relationship of the members should there be a dispute, including where appropriate, the power to order one member to sell his interest in the close corporation on terms fixed by the court. The limited liability of members may be lost if certain of the provisions of the Close Corporations Act, 1984 are contravened.
Members in a close corporation commonly regulate their relationship by way of an association agreement. The association agreement may vary some, but not all, of the provisions of the Close Corporations Act, 1984. A close corporation does not have any directors and there is, therefore, no practical separation between ownership and management.
It is possible to convert a close corporation into a company and vice versa.
All companies are regulated in terms of the Companies Act, 1973 as amended. The Act is modelled very closely on English law, although there are several important differences.
As in the case of close corporations, a company exists as a separate legal entity from its shareholders/members and has an unlimited lifespan. But, unlike close corporations, both natural and juristic persons may become members. Furthermore, since companies must have directors, there is a separation between ownership and management.
Incorporation - A company is incorporated by lodging its Memorandum and Articles of Association and various supporting documents and company forms with the Registrar of Companies. A company may trade only when the Registrar has issued it with a certificate to commence business. Once all the documents have been lodged there is only a minimal delay in the company being incorporated and a certificate to commence business being issued.
A company’s main business must accord with that which is described as its main business in its Memorandum of Association.
Private Companies - Companies may either be private companies (designated by the words “(Pty) Ltd” or “(Proprietary) Limited” after the name) or public companies (designated by the words “Ltd” or “Limited” after the name).
A private company may be established by one or more persons provided that it does not have more than 50 shareholders.
Although a private company is obliged to prepare audited financial statements on an annual basis, these financial statements do not have to be lodged with the Registrar of Companies and do not therefore become public documents.
The right to transfer the shares of a private company must be restricted by its Memorandum and Articles of Association.
Shareholders commonly regulate their relationship by way of a shareholders’ agreement. Save where any provision is contrary to the Companies Act, the shareholders may agree that as between themselves certain of the provisions of the Memorandum or Articles will not be binding on them. Usually they will agree to procure changes to the Memorandum and Articles to give effect to their agreement.
Public Companies - A public company requires a minimum of 7 shareholders.
Public companies are required to lodge audited financial statements with the Registrar of Companies each year and to make such statements available for inspection by members of the public at the registered office of the company.
Only a public company may, but is not obliged to, offer its shares or debentures to the public and only a public company may be listed in terms of the Stock Exchanges Control Act. In order to obtain a listing the company must comply with the listings requirements of the Johannesburg Stock Exchange (with effect from 9 November 2000 known as JSE Securities Exchange South Africa). A public offer will require a detailed prospectus which must contain all the information required by the Companies Act, 1973, except where minimum subscriptions exceed a prescribed amount, or the offer is a private placement.
A new electronic clearing and settlement system for equity securities listed on the Johannesburg Stock Exchange, namely Share Transactions Totally Electronic (STRATE) is in the process of being introduced. This involves the dematerialisation of scrip - i.e. the change over from a paper share certificate to an electronic record of ownership.
External Companies - South African law recognises the corporate identity of juristic persons incorporated outside the Republic of South Africa. However, where any company or other association of persons incorporated outside the Republic of South Africa establishes a “place of business” in the Republic of South Africa, it is obliged to register as an external company. “Place of business” is defined as any place where the company transacts or holds itself out as transacting business. An external company must register within 21 days of establishing its place of business.
Registration involves the lodging of a notarially certified copy of the Memorandum and Articles of Association of the company. If that document is not in one of the official languages of the Republic of South Africa it must be accompanied by a sworn translation into one of the official languages.
In addition, the external company must: give notice of its registered and postal office in South Africa and its financial year-end, appoint an auditor who practises in South Africa, give full details of all directors, and nominate a person resident in South Africa to accept service of documents on behalf of the company.
An external company must file a copy of its annual financial statements with the Registrar of Companies in respect of its South African branch, as well as a certified copy of the foreign financial statements of the company. Exemptions may be granted under certain circumstances.
The external company will be subject to tax on its South African branch profits at a higher rate than South African companies but will be exempt from the Secondary Tax on Companies. The result is that the effective tax rate should be lower for the branch than would be the case for a local company.