Different Types of Business
A business can take one of several forms, and you will need to consider what suits your needs best.
You could operate the business in:
- your own capacity as sole proprietor; or
- as a partnership,
- a private company, or
- a close corporation.
First you need to consider the nature of your intended business.
- What type and size of operation will it be?
- How long is it likely to continue? For example, if you are two or more entrepreneurs planning to trade for a limited period, perhaps selling a fashionable product with a short lifespan, a partnership may be preferable. If, on the other hand, you are not concerned with what happens to the business after your retirement or death, a sole proprietorship may be more appropriate.
- How much risk will it involve?
- How much capital is needed in starting up?
The difference between a partnership and a sole proprietorship is simply that owners of sole proprietorships conduct their businesses in their own personal capacity, while partners in a business bear joint and several responsibilities.
Generally in South Africa, a partnership cannot involve more than twenty members, but there are exceptions in the case of certain professions. If more than twenty members are involved, they have formed a registered company.
A sole proprietor is personally liable for all his or her actions, while the members of a partnership as well as members of a Close Corporation are jointly and severally liable for any actions taken by individual members.
There are a number of advantages in setting up a registered company in terms of the Companies Act, and it is worth spending a little time looking into some of the more important aspects.
- A company is an association of people incorporated in terms of Companies Act. It may have share capital, or, if not, the liabilities of its members may be limited by a guarantee for given amount.
- Companies incorporated without share capital are generally not profit-making enterprises, but charitable organizations and associations not for gain. As this article is concerned with the aspiring entrepreneur, it will focus on companies with share capital, whose objective is to make profits.
- A company with share capital can take one of two forms: it can be either public or private.
The difference between a private and a public company
A public company
- invites subscription for shares from the public.
- It has no limitations in the maximum number of shareholders (although a minimum of seven is required), and
- there are no restrictions on the transfer of its shares.
- The company’s name must end with the word ‘limited’, and
- there are certain provisions of the companies Act which apply specifically to it, such as the company is usually one which is able to raise the substantial share capital necessary for large-scale or capital intensive business.
A private company, on the other hand,
- restricts the transfer of its shares,
- is limited to a maximum of fifty members (with a minimum of one), and
- may not solicit share subscription from the public.
- Its name must end with the words ‘(Proprietary) Limited’, usually abbreviated to ‘(Pty) Ltd’.
- It is not obliged to disclose certain information to the public.
The advantages of forming a company
The most significant advantages of forming a company is
- that its shareholders are not personally liable for its debt.
- A company may not issue partly paid shares.
- Shareholders who have paid the full issue price of the shares allotted to them have no further liability; it’s either to the company or creditors – hence the term ‘limited liability’. (By contrast, in the case of a sole proprietorship or a partnership, individuals are fully liable debts.)
- Limited liability, however, is often by-passed when personal guarantees are required from shareholders for loans or bank overdraft facilities.
- A company, moreover, has its own legal personality, with its own rights and duties, which is completely separate from its members.
- A company also has an indeterminate lifespan, or what is known as perpetual succession, which means that it does not ‘die’ or cease to exist when its members die.
- Finally, the structure and operation of a company is regulated to a large extent by the terms of the Companies Act.
Forming a company
Certain procedures need to be followed when forming a company and you should consult an attorney or registered accountant with the necessary expertise. Specific documents need to be drawn up and lodged with the Registrar of Companies by an agent, who is given power of attorney to act on behalf of the person/s wishing to form the company.
Memorandum and Articles of Association
The most important documents are the company’s Memorandum and Articles of Association, which serves as its charter.
Once this document has been registered, and the Registrar of Companies has issued a Certificate of Incorporation, the company officially comes in to existence. The Memorandum of Association must be signed by all its subscribers, who then become members of the company.
The Memorandum of Association states the following:
- The name of the company, which must have been applied for before registration. An acceptable name (it is usual to suggest a few names in order of preference) must put forward, and this is reserved by the Registrar of Companies in a prescribed CM5 form.
- The main object of the company, i.e. the general nature of the company’s business. It is important not to restrict the business by defining it too narrowly. For instance, it would be wiser to describe the main object of a blanket-making business as the manufacture of textiles, rather than the blankets only. Although a company is usually understood to have fairly unlimited additional objectives, one should nevertheless not be to specific (unless, of course, there is good reason to be).
- The amount of the initial registered share capital divided into share of a fixed amount. In case of ‘pr value’ shares, you would state ‘one hundred shares of five rand each’; in the case of ‘no par value’ shares, you would simply state ‘one hundred shares’.
- Any power that the company is legally entitled to what you want to either exclude or qualify.
- The adoption or ratification of any pre-incorporated contracts. Any contracts entered into by the entrepreneurs prior to the actual formation on the company must be mentioned.
- Any special conditions
- An Association clause explicitly stating the subscribers’ (i.e. entrepreneurs’) wish to be formed into a company, and their agreement to take up a certain number of shares in this company.
Articles of Association
The Articles of Association, meanwhile, are concerned with the internal management of the company, and deal with matters such as shares, borrowing powers, procedures for meetings, voting rights and directors’ powers. The Articles are set out on a prescribed form. Schedule 1 (Table B) of the New Companies Act gives an example of a new model set of Articles, and if you wish, you can adopt either the entire set, parts of it, but we recommend that you consult your attorney in this regard.
When can a company begin doing business?
A company may not begin doing business, even once it is registered, until certain documents (listed below) have been deposited with the Registrar of Companies, after which the Registrar issues a certificate permitting the company to start business. These documents provide information concerning the company’s office bearers and the adequacy of its share capital.
The name of the company
A company must have a registered name, as approved by the Registrar. It is unlikely that the names even remotely similar to existing companies will be accepted. Names that falsely imply patronage by an existing, a company or the government will also be rejected. Where applicable, an abbreviated name and a translation into another official language should also be submitted. In terms of the Companies Act, a company must display its name clearly on the outside of its registered offices, and wherever else its business is conducted.
In addition, the registered name must appear on all company letters, invoices, receipts, cheques, notices, and so on. It is an offence for the company’s name to appear incorrectly on these documents, and any director or officer of the company can be held personally liable for this in certain instances.
Different classes of shares
Shares in a company can belong to different classes, which entitle the holder to different rights.
- Preference shares usually entitle their holders to a dividend at a fixed rate before the holders of other classes of shares receive a dividend. They also usually enjoy preferential repayments of their capital, if (for example) the company goes bankrupt, and is liquidated. Preference shares do not usually entitle their holder to vote at company meetings.
- Redeemable preference shares may be issued on the condition that the company has the option of redeeming them in the future.
- Ordinary shares usually entitle their holders to one vote for each share held at a meeting of shareholders. Ordinary shareholders provide the company with its risk capital, and are entitled to any dividends declared, once preference has been paid.
Of course, one should remember that a private company (as distinct from a public company) can be formed with just one shareholder.
Establishing a company carries ore roles and obligations than those laid down by laws such as the Companies Act.
In 1994, the Johannesburg-based Institute of Directors in Southern Africa sponsored a committee heads by former judge Mervyn King, to examine the issue of corporate governance. While corporate governance is the system by which companies are directed and controlled, the report noted that ‘employees have become far more involved in decision-making and the interests of customers, suppliers and the community are now far more relevant to corporate decision-making’
It notes too that ‘entrepreneurship and enterprise are among the important factors that business. Emerging economies have been driven by entrepreneurs who take business risks and initiatives’. In a nutshell, corporate governance is ethical business practice. A copy of the 70-page King report can be obtained from our offices. Some of its recommendationsare contained in the following pages.
It is essential to be aware of the requirements of the Companies Act, even if you have asked an attorney or auditor to see that all its provisions are carried out. The more important information concerning director, including their duties, liabilities, and power will now be addressed, in particular where they are determined by the company’s Articles of Association, or simply by common law. A company is a legal juristic ‘person’, which can only act though its members or directors. Directors are responsible for the running of the company, acting as agents or trustees.
Every private company must have at least one director. The Articles of Association usually provide for the appointment of the initial directors, s well as the procedure for filling subsequent vacancies and nominating alternative or additional directors. Directors can also be appointed at a general meeting of the company’s shareholders.
In the case of a new company, if no directors were appointed at incorporation, then the subscribers to the Memorandum of Association are considered its directors until alternatives are formally appointed.
The more common practice, however, is to lodge the application for the incorporation of the new company with the Registrar simultaneously with issue of the written consent of the person/s appointed to act as director/s is needed. This written consent must be lodged with the company on a special CM form.
If the Articles of Association require directors to hold qualification shares, then they must either have been subscribed for, or an undertaking given that they will be taken up on a CM28 form. The King report notes that directors ‘direct the company as to strategy and structure… (They) ensure that the company has adequate systems of internal controls both operational and financial.’ They appoint the chief executive, monitor management and ensure the company is run on ethical lines.
Restrictions on appointments as directors
Apart from any restrictions that may be stated in a company’s Articles of Association, the Companies Act states who may not be appointed directors. These include the following:
- Any minor;
- An rehabilitated insolvent;
- Anyone removed from a position of a trust as a result of misconduct;
- Anyone convicted of a certain specified criminal offences;
- Anyone disqualified by court order (which usually occurs when someone has been proved dishonest in the information or operation of company).
In addition, a company’s auditors may not hold office as directors of the company. It is worth noting that anyone disqualified from being appointed a director is not allowed to take part in the management of a company either.
The Kind report said directors must never permit a conflict of interests, they must insist that the board papers and information are given to them well ahead of the board papers meeting so they have time to study them, and they must ensure annual budgets are prepared and study them, and they must ensure annual budgets are prepared and that procedures and systems are in place to act as check and balances on the information they receive, among other tasks.
Some specific terms
An executive director is any employee who is appointed of a company. The exact role of a managing director is not defined by the Companies Act. However, he or she is usually one of the company’s directors who, either in terms of the Articles of Association, or on appointment by the order director, has been given the responsibility of controlling the affairs of the company in good faith. In terms of the Companies Act, a managing director, together with the manager and secretary, is defined as an officer of the company, and is legally responsible for performing a large number of company activities. Failure to carry these out leads to criminal prosecution.
As in the case of a managing director, the duties of the chairperson of a board of directors are not defined by the Companies Act. The chairperson is a director who may be elected by the other a company. The chair of the board (unless stated otherwise in the Articles is Association) has no additional powers over the other directors. However, she or he is generally the most important company spokesperson at the directors’ meeting. Unless prohibited from doing so by the Articles, the chair of the board can also occupy the position of managing directors.
Register of directors
A company must keep a register of its director, shareholders, auditors, and officers, and this must be available for inspection at its registered office. This register must contain details such as full name, date of birth, date of birth, nationality, occupation, residential, business and postal address, date of appointment, details of other directorship, and so forth. A CM from sets out exactly what information must be supplied. This form must also be given in within 14 days of any change of appointment.
The director’s duties
In common law, a director has fiduciary duties (i.e. he or she is effectively a trustee of the company), and must always act in good faith towards the company and for its benefit. A director’s personal interests should not be allowed to clash either the interest of the company. Directors are also expected to act within the limits of their authority. If they exceed their stated authority, they may become liable to the company for any loss suffered.
A breach of fiduciary duties can render a director criminally liable. In terms of the Companies Act, a person accepting appointment as a director must complete and sign the prescribed CM form. Any changes in its particulars must be lodged with the company in writing with fourteen days on a CM form.
When a person accepts appointment as a director of a company (which still has to be formed, completed and signed), starting the capital of the company is considered adequate. If qualification shares are required, a director must subscribe in the Memorandum and Articles of Association for the required number, or else give an undertaking, on a relevant CM form, that they will be acquired.
A director who does not hold the specified number of qualification share must vacate her or his directorship. The Companies Act states that a company must keep accounting records, and it is the responsibility of the directors to see that these are kept, and that they represent the transactions of the company and its financial position honestly and accurately. Failure to this will render both the company and its directors liable to ensure that annual general meeting of the company.
The annual financial statements must include a balance sheet, income statement, source and application of funds statement, directors ‘report and an auditors’ report. The directors’ report must deal with every material matter concerning the state of affairs of the company, and must conform to the requirements laid down in Schedule 4 of the Companies Act. Certain duties are imposed on directors with regards to meetings. The directors and secretary must ensure that minutes are kept of proceeding of both the directors’ meetings and meetings of members of the company. Minute, signed by the chairperson of the meeting must be available for inspection by any member of the company at its registered office. Directors must also record their attendance at directors’ meetings by signing an attendance register.
Any contract which the company intends entering into must be declared and full particulars given at the first possible meeting of directors. Such a contract may not be entered into unless approved by the directors. To be valid directors’ meetings must be convened by the chairperson, sufficient notice must be given, a quorum (the exact number of office-holders that constitute a quorum must be stated in the articles) must be present, and the meeting must be correctly minuted. Variances from these formalities are only permitted if they are laid down in the Articles.
Should an auditor not be appointed or re-appointed at an annual general meeting, the directors are obliged to fill the vacancy within 30 days. Every public company (and every private company which chooses to do so) must appoint auditors who are registered as public accountants and auditors in terms of the Public Accountants’ and Auditors’ Act.
It is the duty of auditors to report to the shareholders of a company whether, in their opinion, the annual financial statements of the company provide a fair representation of its financial position. Directors also have duties in terms of the company’s Articles of Association, which may vary from company to company. Most private companies have articles very similar to comprehensive range set out in Table B of the Companies Act. The main duty of the directors is, of course, to manage the business of the company.
In addition to their duties, directors also incur various liabilities in terms of the Companies Act or the Articles of Association. For example, in terms of the Companies Act, a director who is party to any false report or statement concerning the affairs of a company is guilty of an offence. Similarly, directors (or even non-directors) are personally liable for rectors are the debts of a company if they were party it’s carrying on business recklessly, or with intent to defraud.
Directors are primarily responsible for seeing that a company is properly managed. This is achieved either by managing the company themselves, or by appointing a non-director to do the job for them. The Articles of Association usually define the powers and rights of the directors regarding their management of the company in general terms. More specific powers may be defined as well, such as the right to appoint alternative or additional directors, managing directors, and managers.
All the powers and rights of directors are, of course, subject to providing there is no conflict with either the Articles of Association or the Companies Act; special powers may also be conferred on directors at company general meetings. Directors’ powers are limited in terms of both the Companies Act and the Articles of Association.
They do not have the power to allot or issue shares, or to dispose of the company’s assets without the approval of a general meeting of the company. The Articles may limit the directors’ power to borrow money and to mortgage the company’s property without prior approval obtained at a general meeting of the company.
Examples of some criminal offences that officers (as defined in the Companies Act) of a company can commit are:
- Failure to keep minutes of company meeting, meetings of directors, or managers;
- Failure to lodge written consent to act as a director or officer;
- Falsifying books and records;
- Failure to submit details to the Registrar concerning company membership;
- Faire to use the prescribed name of the company on company documents;
- Any breach of whole host of regulations regarding share capital and shares, including the allotment and issue of shares, transfer of shares, classification of shares, director’ right to deal in shares, and restrictions placed on certain shares;
- Failure to register special resolution;
- Failure to circulate notice of resolutions and statement to members entiteled to receive them;
- Not holding the annual general meeting at the appropriate time;
- Issuing unsigned annual financial records;
- Failure to keep proper accounting records;
- Failure to convene general meetings when these are requested by members;
- Failure to permit inspection of the minutes of company meetings;
- Pretending to be a director when not validly appointed as one;
- Failure to submit the necessary details in the register of directors and officers;
- Making loans to directors or officers, if this is prohibited by the Articles of Association;
- Misrepresenting the affairs of the company; and
- Not notifying the Registrar if an auditor has been appointed.
Do the actions of a director bind the company?
Any director of a company acting with authority on its behalf as an agent legally binds the company. In some instances, a company can be bound by the actions of a director even if that director did not have authority to act (in such case, however, the company can claim damages from the director).
Sometimes a director does not act as an agent of the company, but for the company. For example, whenever a contract or a cheque must by law be signed by a person who has the authority to act on the company’s behalf, a director or a non-director can sign, not as an agent to the company, but on behalf of the company.
All the company business letters must contain the names of all the directors. Failure to do so is an offence. In addition, publicizing a person as a director when he or she is not one is also an offence. A director usually ceases being a director when he or she voluntarily submits their resignation. The company is not even a required to accept the resignation for it to be effective.
A director mat also be removed from office be an ordinary company resolution, provided that special notice of the resolution has been given. A director can also be removed from office by amending the Articles of Association of the company, which usually specify the directorship period.
Office-bearers of a company
The Companies Act does specify that a secretary of the company must be appointed. However, it does also state that the secretary of a company is an officer of the company, regardless of designation, who performs secretarial duties.
Anyone who performs secretary’s duties normally involve the administration of the company is, like a director, in a fiduciary position, even though they are a servant of the company. The secretary’s duties normally involve the administration of the company, i.e. attending to statutory returns, ensuring that financial records are kept, attending meeting of directors and members, and seeing to it they are minuted.
The secretary’s written consent to act as an officer of the company must be lodged with the company on a CM form, and the secretary’s particulars must be recorded in the registrar of the directors and officers. Every company must have a public officer who need not be a director. The appointment of the public officer must be notified to, and approved by, the Receiver of Revenue.
The public officer is the person upon whom legal documents can be served. It is important to remember that in South African law, the term ‘manager’ in relation to a company means any person who is the ‘principal executive officer’ of the company for the time being, irrespective of what name he or she is designated or whether or not he or she is a director. Employees, whose job title may include the word manager, branch manager, etc, need rights and duties are normally set out in service contract or letter of appointment. Remember though, that the principal executive office, like the managing director and secretary, has certain duties laid down in terms of the Companies Act.
It is worth nothing the difference between a director of a company and a manager. A director must be appointed by the shareholders or other directors at a general meeting, and is expected to manage and control the company in terms of the Companies Act. His or her duties are defined by law. A manager is thus not essential in terms of law. A manager (whether a principal executive officer or not) is appointed by the directors, and is an employee of the company.
Remember In terms of the Companies Act, every managing director, manager and secretary is an officer of the company.
Members of a company
A company, while having its own legal personality, is nevertheless made up of an association of members, who are its shareholders. Subscribers to the Memorandum of association become members once the company is incorporated. These terms may see a little confusing at first.
If you decide to start your own business and set about forming it yourself, you become its ‘promoter’ and as an obvious subscriber to the Memorandum and Articles of Association, you become a ‘member (shareholders) of the company’.
Every company must keep a register of its members. This is also known as its share register and it must contain certain information regarding members’ names, adresses, and shares. The register of members must be open for inspection by any member of the company.
A company resolution is a formal decision that a company takes at a general meeting, usually by a majority vote of those members (shareholders) who are entitle to vote. A resolution taken on a simple majority basis is known as a ‘ordinary’ resolution, and is needed for all decisions taken at a general meeting. Such a resolution is usually operative from the date of its adoption and is called a ‘special’ resolution. On the other hand, a special resolution is needed for most major decisions.
Companies require special resolution to change the following: its object (primary purpose), its Articles of Association, its name, its share capital by increasing or decreasing it, and also to wind up the company. A ‘special’ resolution is effective only once it has been lodged for registration with the Registrar of the Companies on a CM form.
In terms of the Companies Act, there are certain requirements for a valid special resolution:
- A meeting of the members of the company must be convened by giving at least 21 days’ clear notice in writing. This can be waived if the written consent of al members is received before or at the meeting.
- The members must be informed in the notice of the meeting that a special resolution is to be proposed and the reasons for this given.
- The resolution must be passed by at least three-quarters of the members present (either in person or by proxy) at a general meeting; and they must hold at least 25% of the total shares which are eligible for voting between them.
In terms of the Companies Act, a company is obliged to hold an annual general meeting. In case of a new company, the first meeting must be held within 18 months of the company’s incorporation, and thereafter within not more nine months of the end of every ensuing financial year of the company and within not more than 15 months after the annual general meeting.
The Companies Act also lays down certain matters that have to be dealt with at this meeting such as the annual financial statements, the approval of dividends, and the election of directors. Other general meeting may be convened by the directors of the company, or in certain cases specified by the Act, by the members (shareholders). In special circumstances, the Court or Registrar is empowered to call a meeting.
To sum up
- Look carefully at what form your business should take.
- If you decide to form a company, call in an attorney or registered accountant who specializes in the necessary procedures.
- Check the list of required documents, and ensure that all information provided is correct.
- Register the name of your company, and authorized share capital.
- Take careful note of what duties, liabilities, and power are ascribed to or withheld from directors in terms of the Companies Act.
- Also check that other company resolution office-bearers are aware of their duties in term of the law.
- Take steps to ensure that the company resolution, meetings, annual returns, and fees paid comply with the stipulation of the Companies Act.