Chapter 4

Question 1

Considerations when choosing a company

Answer 1

• Legal personality
• Limited Liability
• Procedures of establishment
• Parties involved
• Attaining capital
• Regulation and cost of compliance
• Costs and Taxation

Question 2

Sole Proprietorship - SP

Answer 2

Owned and operated by a natural person (individual).
- No existence separate from the owner.
- Operates under the name of its owner or under a fictitious name.
- Only the proprietor has the authority to make decisions for the
business.
- The proprietor assumes the risks of the business to the extent of
all of his or her assets whether used in the business or not

Regulations
> Common law

Pros
> No formalities at formation or closure.
> No legal or statutory requirements.
> Proprietor not accountable to a board of directors or
shareholders.
> Income accrues directly to proprietor.
> Tax consequences of trading as a natural person are relatively
simple.

Cons
> No distinction between assets of business and personal assets
of proprietor.
> Does not have the benefits of perpetual succession.
> All licenses and legal agreements entered into also cease in the
event of the death of proprietor.
> Not always easy to sell of dispose of a SP as a going concern.

Tax
> Do through owner name
> Personal income tax scale + personal tax rebates

Question 3

Partnership

Answer 3

An agreement between two or more persons who join together to carry out a trade, a business or a profession.
- Usually formalised by means of a partnership agreement. (see
example in next slide)
- Each partner may contribute money, property, labour or skills.
- Managed to the joint benefit of partners in accordance with the
agreed –profit-sharing ratio.
- Similar to a sole proprietorship except that a group of owners
replaces the sole proprietor.
- Partnership agreement

Regulations
> Common + contract law
> fin statements
> audits

Pros
> No formalities at formation or closure.
> No legal or statutory requirements.
> Combined business skills and knowledge.

Cons
> Partners are jointly and separately liable for the debts of the
partnership.
> Does not have the benefits of perpetual succession.
> Can be difficult to dispose of one’s interest.

Tax
> Partners in their names
> Personal income tax scale + personal tax rebates

Question 4

Close Corporation - CC

Answer 4

As from 1 May 2011 (implementation date of the Companies Act 71 of 2008), no new CC’s can be registered.

• A CC is a legal entity with its legal personality.
• A CC has no share capital and therefore no shareholders. The
  owners of a CC are the members and holds a % membership
  interest.
• Members limited to natural persons (Max 10).
• An association agreement that regulates relationship between
  members.
• For income tax purposes, a CC is dealt with as if it is a company.
• Governed by Close Corporations Act (and to a certain extent the
  Companies act)
• Association agreement

Regulations
> CC Act, Companies Act, Common law
> Fin statements

Parties involved
- Members - also control

Pros
> The Close Corporations Act is less complex than the Companies Act. Also provides built in protection in case of no association agreement.
> Perpetual succession.
> Limited liability of members.
> No directors.

Cons
> Simplicity of Close Corporations Act leads to confusion and
uncertainty.
> Many sections of the Companies Act are also applicable.
> In reality members can be personally liable for debts.
> In the absence of an association agreement any member can
enter into contracts on the CC’c behalf.
> Need to set up financial statements.

Tax
> Apply through CC
> standard tax on profit (28%);
> dividend withholding tax (20%)

Question 5

Company

Answer 5

A separate legal entity, distinct from its shareholders and directors.
- Assets and profits of the company belong to the company and
shareholders are only entitled to dividends if, and when,
declared.
- Governed by Companies Act.
- MOI

Parties involved
- Shareholder, directors
> directors control

Regulations
> Companies Act, Common law
> Fin statements
> Audits for public companies

Requirements:
> Memorandum of Incorporation (MOI).
> Registration with CIPC.

Different types of companies as sourced from the MOI:
> A public company (Ltd)
> A private company (Pty Ltd)
> A personal liability company (Inc)

Pros
> Perpetual succession.
> Easy transfer of ownership.
> Limited liability of shareholders.

Cons
> Difficulty and expense of formation.
> Regulation and increased paperwork.
> Agency problems.