Topic 1

Question 1

Sole proprietor

Answer 1

A business that is founded and owned by one person in their own name and for their own profit or loss.
May operate under a business name that differs from their own name

Question 2

Ownership of sole proprietor

Answer 2

It can only have one owner

This owner has full discretion to run the business as they see fit, without consulting other parties

Question 3

Capital of sole proprietor

Answer 3

Consists only of what the owner has contributed which is limited by their personal means or busy the amount that they can borrow

Question 4

Protection of sole proprietor

Answer 4

Not a separate legal entity

All the assets and liabilities of the business belong to the business owner in their private capacity

Question 5

Distribution of profit for sole proprietor

Answer 5

All the profits of the business belong to the owner in their personal capacity

The owner can decide whether to use the profits or to retain them in the business

Question 6

Initial administrative requirements for sole proprietor

Answer 6

A sole proprietor does not have to go through a formal process to register their business at the startup stage, as long as they have contractual capacity

Exception if some kind of license is required to start trading, like registering with Financial Sector Conduct Authority (FSCA)

Question 7

Ongoing administrative requirements for sole proprietor

Answer 7

Tax records relating to the business and that were used to prepare the tax return must be kept by the sole proprietor for 5 years

Question 8

Continuity in sole proprietorship: normal course of business

Answer 8

The sole proprietorship will be terminated whenever the business owner decides not to continue with the business.
In such cases, the business owner can dispose of the assets of the business as they deem fit.
Sole proprietorship will also be terminated if the owner becomes insolvent or dies

Question 9

Continuity in sole proprietorship: death

Answer 9

Unless the sole proprietor’s Will expressly state that the executor may continue with the business as a going concern, the executive will have to liquidate the business immediately when the sole proprietor passes away.
This could cause hardship to the sole proprietor’s employees and may lead to financial loss to all the parties involved.
The dependants of the deceased may also end up without an income if the business ceases to exist

Question 10

Partnership

Answer 10

A legal relationship between two or more legal entities.

Question 11

Ownership in partnership

Answer 11

The partnership used to comprise between 2 and 20 people.
However, as a result of changes in the Companies Act, there is no no limit to the maximum number of partners in a partnerstip.
The relationship between partners is regulated by the partnership agreement.
They can decide amongst themselves who will be responsible for which tasks in the business

Question 12

Capital in partnership

Answer 12

Each partner will contribute something to the business.
The monetary contributions of the partners are held in a separate partnership account.
The amount of capital contributed is limited by the amount of capital available to the individual partners either through their own resources or through borrowings

Question 13

Protection in partnership

Answer 13

Not a separate legal person
The partnership agreement is a contract between the partners only and can not be enforced against third parties.
This means that a creditor who is owed money by the partnership is not obliged to collect from individual partners and their respective profit-or-loss-sharing ratios.
The partners are, therefore, jointly and severely liable for the partnership dates, in the proportion agreed to in the partnership agreement.

Question 14

Distribution of profit in partnership

Answer 14

Profits are split in the proportions agreed upon in the partnership agreement

Question 15

Initial administrative requirements for partnership

Answer 15

A partnership is created through agreement amongst private individuals who have contractual capacity.
There are no legal requirements for the creation of a partnership, and the agreement does not even have to be in writing

Question 16

Ongoing administrative requirements for partnership

Answer 16

The tax records relating to the business and from which the tax returns of each individual partner or prepare must be kept for 5 years.

There are no specific accounting requirements, though under the common law, financial accounts, together with all related books and documents, must be rendered annually.

Question 17

Continuity in partnership: normal course of business

Answer 17

The partners may agree to terminate the partnership for whatever reason

The insolvency of one of the partners will automatically terminate the partnership.
The court may order the termination of a partnership where there has been a permanent breach of trust between the partners

Question 18

Continuity in sole proprietorship: death

Answer 18

On the death of a partner, the partnership dissolves and a new partnership agreement is required between the remaining partners. The assets of the partnership will
have to be liquidated and all liabilities settled in order to pay the deceased partner’s share to the deceased estate

Question 19

Ownership of close corporation

Answer 19

Allowed to have between 1 and 10 members
They are the owners of CC.
They may only be natural persons except in these instances:
1. A trustee of a testamentary trust
2. Executor or administrator
3. a trustee or curator of an insolvent estate

Question 20

Capital for close corporation

Answer 20

Consists of the members’ contributions.
When the CC is formed, each member has to make a contribution to it.
This contribution can consist of capital, services, or property and does not have to be in direct relation to the size of the member’s interest.
The amount of capital contributed is limited by the amount of capital available to the members.

Question 21

Protection for close corporation

Answer 21

The CC is a legal entity in its own right.
This means that the entity owns all of its assets.
It is liable for its own debt, and it can sue and be sued in its own name.
It protects members’ personal asset against claims of creditors

Question 22

Distribution of profit for close corporation

Answer 22

The profits of the CC belong to the CC.
The profits are paid out to the members as distributions in the same proportion as their member interest.
The timing of the distributions needs to be agreed on by the member.
Similar to the dividends that a company distributes
These distributions must be made when the CC is still solved and still meets its liquidity requirements

Question 23

Initial administrative requirements for close corporation

Answer 23

Since the registration of new CCs was abolished by the Companies Act, the initial administrative requirements of the CC are now irrelevant

Question 24

Ongoing administrative requirements for close corporation

Answer 24

The members need to decide on the internal running of the business, and this agreement can be contained in a formal, written association agreement.

A CC is required to keep comprehensive records of its business activities, which should be sufficient to fairly present the financial position and performance of its operations.
It’s required by law to appoint a properly qualified accounting officer who needs to keep proper books of account and maintain records for the CC and these accounts have to be signed by members within nine months of the CC’s year-end
The letters “CC” have to be used as a part of the name of the business, and its registration number needs to appear

Question 25

Continuity in close corporation: normal course of business

Answer 25

All current CCs can continue to exist indefinitely until deregistration or dissolution.
It is terminated when the members decide to voluntarily apply for deregistration, or a court orders its liquidation
It can convert to a company if there’s a written statement drawn up by members who hold at least 75%, a memorandum of incorporation is drawn up, and the prescribed filing fee has been paid

Question 26

Continuity in close corporation: death

Answer 26

A CC exists independently of any changes in its membership.
The death of a member will not affect the existence of a CC.
The remaining members may agree to purchase the deceased members’ interest from the executor if they have sufficient funds available in order to do so

Question 27

Types of companies

Answer 27

Profit companies

Non-profit companies

Question 28

Profit companies

Answer 28

Any company established for the financial gain of its shareholders

private, public, personal liability, and state-owned company

Question 29

private company

Answer 29

The memorandum of incorporation prohibits the offering of its shares to the public and restricts the transferability of its shares.
There was a previous limit of a maximum of 50 shareholders in private company, but the limitation was removed by the Act

The name ends with “Proprietory Limited” or “(Pty) Ltd”

Question 30

public company

Answer 30

Not restricted in terms of offering shares to the public.
Shares are freely transferable, and the company may be listed on a stock exchange.
These companies are highly regulated
They are required to have the financial statements audited and must comply with all International Financial Reporting Standards (IFRS)

The name ends with “Limited” or “Ltd”

Question 31

personal liability company

Answer 31

Mainly used by members of professional associations who wish to benefit from some of the advantages of a company, such as perpetual succession
Directors are jointly and severely liable for all debts and liabilities incurred during the time as a director, together with the company

The name ends with “Incorporated” or “Inc.”

Question 32

state-owned company

Answer 32

Listed as a public ntity in terms of the Public Finance Management Act or owned by a municipality as contemplated in the Local Government: Municipal Systems Act

The name ends with “SOC Ltd”

Question 33

Non-profit companies

Answer 33

incorporated for public gain, and the profits are not distributed

They may be established by an organ of state, a juristic person, or 3 or more natural persons who act together.
The name of a company must end with “NPC”

Question 34

Ownership of companies

Answer 34

The owners of a company are known as ‘shareholders’.
They invest capital amounts in the company in exchange for shares in the company that are issued to them

Question 35

Shares

Answer 35

One of the equal parts into which a company’s capital is divided, entitling the holder of a proportion of the profits

The units into which the ownership interest in a profit company is divided. The share capital is made up of the funds contributed by shareholders to the company in exchange for these shares in the company

Question 36

Distinction between directors and shareholders

Answer 36

Director: controls the company. Have both a fudiciary duty and a duty of reasonable care

Shareholder: owns the company. Cannot bind the company in any way

Question 37

How directors have to act according to Section 76

Answer 37

1. In good faith and for a proper purpose
2. In the best interests of the company
3. With the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions in relation to the company

Question 38

Capital for companies

Answer 38

The capital of a company is raised by issuing shares.
A company can raise a large amount of capital, especially if it is a public company.
Because the cost of a share is not excessive and the large number of shares can be issued, it allows the company to raise a lot of capital
The value of a company is limited to the value of the shares authorized by the Memorandum of Incorporation

Question 39

Protection for companies

Answer 39

A legal entity in its own right
owns all its assets
is liable for its own debt.
It can sue and be sued in its own name.
This separate legal personality of the company protects shareholders’ personal assets against claims of creditors

Question 40

Distribution of profit for companies

Answer 40

The profits that the company makes also belong to the company.
A company is not obliged to declare dividends to shareholders, but shareholders can appoint or remove directors by voting at the annual general meeting and the shares of a company can be bought or sold fairly easily

Question 41

Initial administrative requirements for companies

Answer 41

The founding document of a company is the Memorandum of Incorporation.
The required number of persons (1 for private and 3 for public/non-profit) must complete, sign and file the MOI with the Companies and Intellectual Property Commission (CIPC), together with the Notice of Incorporation, in order to facilitate the registration of the company.
The MOI contains information on the directors and quantity of shares that the company is authorized to issue

Question 42

Ongoing administrative requirements for companies

Answer 42

Financial statements: The act requires a company to prepare annual financial statements each year and to lay such statements before the annual general meeting. It is the responsibility of the directors to prepare them.

Auditing: The act currently requires that annual financial statements of most private companies can either be voluntarily audited or independently reviewed in a manner that satisfies the regulations

Question 43

Continuity for companies : normal course of business

Answer 43

Companies have unlimited continuity, and are unaffected by changes in ownership

Question 44

Continuity for companies : death

Answer 44

As the company is a separate legal entity, the death of a shareholder has no impact on the existence of the company.

Unless the Memorandum and Articles of Association determine otherwise, a shareholder may be bequeath their shares in their Will to whoever they want without first obtaining the consent of the co-shareholders.