When you start a business, you must decide whether it will be a sole proprietorship, private company, public company or personal liability company. Business owners must select the structure that best meets your needs, including the potential risks and liabilities of your business, the formalities and expenses involved in establishing and maintaining the business structures, the income tax situation and your investment needs.
This BizConnect guide outlines the structure and reporting requirements of each business as well as an explanation of how to register a business.
Two types of companies may be incorporated under the new Companies Act, non-profit companies and profit companies.
Private Companies (Pty) Ltd
Private companies are comparable to companies of the same status under the Companies Act, 1973 and are characterised by the following:
- They are subject to fewer disclosure and transparency requirements.
- A private company will still be prohibited from offering its shares to the public and the transferability of its shares will be restricted, but it may have more than 50 shareholders.
- The name of a private company must end with the expression "Proprietary Limited" or its abbreviation "(Pty) Ltd".
- The board of a private company must comprise at least one director, or any other minimum number as stipulated in its MOI. Each incorporator is a first director of the company.
Public Companies (Ltd)
A public company can have any number of shareholders and the shares can be freely traded. Quarterly reports and annual financial statements have to be lodged with the Companies and Intellectual Property Commission (CIPC), where they become available for public inspection. These are the type of companies which are usually listed on the JSE.
They are characterised by the following:
- Their MOI permits them to offer shares to the public but restricts, limits or negates their right of pre-emption.
- The name of a public company must end with the word "Limited" or its abbreviation, "Ltd".
- A public company must have at least three directors
Personal Liability Companies (Inc)
A personal liability company's name must end with the word "Incorporated" it meets the criteria for a private company, and its MOI provides that the directors and past directors are jointly and severally liable, together with the company, for any debts and liabilities of the company that were contracted during their respective terms of office.
Non-profit companies (NPC)
A non-profit company is incorporated for public benefit or other object relating to one or more cultural or social activities, or communal or group interests. The income and property of an NPC are not distributable to its incorporators, members, directors, or officers.
Foreign and external companies
A foreign company is incorporated outside of South Africa, irrespective of whether it is a profit or non-profit company or carrying on business in South Africa or not. It may not offer securities to the South African public unless it follows the specific provisions of the Companies Act, relating to offers to the public. A foreign company is required to register as an "external company" with the CIPC if it conducts business in South Africa.
All companies have to maintain accounting records and prepare annual financial statements within six months after the end of their financial year. The same deadline applies to close corporations.
Often start-up entrepreneurs make the mistake of trading from their personal bank account. This makes it harder to differentiate between your personal expenses and business expenses. It also doesn’t allow you to build up a credit risk profile for your business, which is an important factor should you ever want to approach a bank for financing. Rather, start trading as a business from the get-go by opening up a Business Current Account.
All companies must lodge an annual return, but only companies that are required to have their financial statements audited also have to lodge these with the CIPC with their annual returns.
Annual financial statements for a public company must be audited and in the case of any other company must be audited if required to. This depends on whether the company is operating in a space that can be defined as having public interest.
Certain private companies have to have their annual financial statements audited, but some fall outside the sphere of public interest and do not have to be. They are reviewed, or even exempted from audit and review. Other companies may be audited voluntarily.
New company registrations
Business owners can register their companies online on the CIPC's website. Once you are registered as a CIPC customer you will be able to access the website. After you have logged in, look for the 'New Companies' link under the 'Companies' tab. For more information, go to www.cipc.co.za
What does it cost to register a company?
- The basic filing fee is R175 if the company's Memorandum of Incorporation (MOI) is in form 15.1A or 15.1C, or R475 in any other case and/or CoR 35.1 if any
- Fee to transfer registration of a foreign company is R400
- Fee to incorporate an external company is R400
A company is incorporated by the lodging of the following main forms:
Memorandum of Incorporation (MOI)
The most important document governing a company is the MOI. The Act imposes certain specific requirements on the content of a Memorandum of Incorporation, to protect the interests of shareholders in the company. It provides for a number of default company rules and alterable provisions, which companies may accept or alter as they wish as long as it is in line with the Companies Act.
The Memorandum of Incorporation CoR 15.1A-E (whichever is applicable) contains the following information:
- Detail of Incorporators
- Number of directors and alternate directors
- Share capital (maximum issued)
- Content of MOI
The Notice of Incorporation (CoR 14.1), which must be lodged together with CoR 15.1 contains the following information:
- Type of company
- Incorporation date
- Financial year end
- Registered address (main office)
- Number of directors
- Company name
- Whether company name will be the registration number;
- The reserved name and reservation number;
- List of four names to be checked by the CIPC.
Note on Close Corporations (CCs)
Under the new Companies Act, no new close corporations can be incorporated. Current CCs can choose to either convert to a company or continue to exist until deregistration or dissolution in terms of the Close Corporations Act. CCs that continue to exist will have to compile financial statements, but will be subject to audit on the same terms and conditions as companies.
Note on Sole Proprietors
Also known as sole traders, sole proprietors trade as themselves. They run a business on their own - such as repairing fridges - and have no need to create a company name or structure. This is the simplest form of business and requires little effort to set up and get going. The biggest risk for this structure is that if the business fails, creditors can take all the assets of the owner, because they are the business.