Chapter 2 notes - Summary Companies and other Business Stuctures PDF

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These notes deals with all the important work that needs to be covered for tests and exams. Chapter 2- legal personality, types of companies and company formation...

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Chapter 2 – Legal personality of company and company formation

2.1 Companies and other business entities: why incorporate a business? Number of matters that require careful consideration prior to deciding which business entity will be the most appropriate for a particular business. These include:  the number of persons who will be involved in the business,  the extent of their involvement,  the capital required to commence business,  the sources of that capital (i.e. equity and/ or debt),  the requirements of customers and clients,  and the strategic objectives of those involved. Any of the following can be used:  company;  close corporation;  business trust;  partnership;  or any combination. An example of a combination choice is a company that carries on business using assets in its trading activities that are not owned by the company itself but are held in a trust that leases the assets to the company. Shareholders of the company could be the same people who are the beneficiaries of the trust. Tax issues must also be considered when considering the most appropriate business entity, because the South African tax system is not entity neutral. Companies Act, 2008 recognizes different types of company" and allows great flexibility in company structure as expressed in a company's Memorandum of Incorporation (MOI) Income Tax Act' also recognizes a variety of different companies for tax purposes and grants favorable tax treatment to some (such as small business corporations and micro businesses).

2.5 Types of company The 2008 Act provides for two types of company namely;  profit companies,  and non-pro companies. Company is a profit company if it is incorporated for the purpose of financial gain for its shareholders." A profit company may be incorporated by one or more persons. The Act does not restrict the maximum number of shareholders in a profit company In terms of the 1973 Act, a private company could not have more than 50 shareholders. There are four types of for-profit company: 1. a public company; 2. a state-owned enterprise; 3. a personal liability company; and 4. a private company.

2.5.1 The public company    

Public company = profit company that is not a state-owned enterprise, private company or personal liability company Shares may be offered to public and are freely transferrable Could be listed or unlisted (on JSE) MOI sole governing document of company

2.5.2 The state-owned company    

State-owned company – SOC = profit company Either listed as public entity or owned by a municipality SOC = national government business enterprise Is a juristic person

2.5.3 The personal liability company A personal liability company" is a private (profit) company used mainly by professional associations such as attorneys, entrepreneurs and stockbrokers who wish to exploit some of the advantages of corporate personality such as perpetual succession. A personal liability company's MOl will state that it is a personal liability company, which usually means that the directors are jointly and severally liable together with the company for all contractual debts and liabilities incurred during their terms of office. The Companies Act, 2008 provides that if an amendment to the MOl of a personal liability company has the effect of transforming that company into any other category of company company must give at least 10 business days' advance notice of the filing of the notice of amendment to the following: 

any professional or industry regulatory authority that has jurisdiction over the business activities carried on by the company; and

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any persons who, in their dealings with the company, may reasonably be considered to have acted in reliance upon the joint and several liability of any of the directors for the debts and liabilities of the company, or who may be adversely affected if the joint and several liability of any of the directors for the debts and liabilities of the company is terminated as a consequence of the amendment to the MOL

2.5.4 The private company Private company is a profit company whose MOl prohibits the offering of its shares to the public and restricts the transferability of its shares. No restriction on the number shareholders of a private company in terms of the 2008 Act. Under the 1973 Act, shareholders of a private company were restricted to a maximum of 50.

2.5.5 The non-profit company  

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Non-profit company is a company that was previously recognized in terms of s 21 of the Companies Act, 1973. The 2008 Act stated, such companies must have as at least one of their objectives a public benefit object or an object relating to one or more cultural or social activities or communal or group interests. All assets and income of a non-profit company must be used further the company's stated objective.

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When a non-profit company is being wound up or dissolved, no member or director of that company is entitled to any part of the net value of the company after its obligations and liabilities have been paid. Entire net value of the company must be distributed to one or more non-profit companies, external non-profit companies carrying on activities within the Republic, voluntary associations, or non-profit trusts having objects similar to the company's main object. A non-profit company is not required to have members, but the provisions of its MOl may provide for the company to have members.

Two categories of member are provided for namely;  voting and  non-voting members. Members - used for non-profit companies, whereas Shareholders - used for profit companies.

2.6 Transitional provisions and close corporations 

The 2008 Act ensures that the incorporation of a company is made accessible and easy.

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Designed to facilitate the formation and maintenance of small companies.

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The 2008 Act recognizes that existing close corporations should be free to retain their current status until such time as their members may determine that it is in their interests to convert to a company under the Act.

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The Act therefore provides for the indefinite continued existence of the Close Corporations Act.

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Provides that the Close Corporation Act will not be an avenue for the incorporation of new entities or for the conversion of companies incorporated under the 1973 Act into close corporations.

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In other words, close corporations that existed at the commencement of the 2008 Act will be allowed to continue, but the formation of a new close corporation after the date of commencement of the 2008 Act is not possible.

2.7 External companies External companies – foreign company carrying on business or non-profit activities within SA Section 23(2) – meaning of conducting business or non-profit activities In terms of section – foreign company – deemed to conduct business or non-profit activities in SA if it: 

Is a party to one or more employment contracts within the Republic

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Or is engaging in a course of conduct Or has engaged in a course or pattern of activities within the Republic over a period of at least 6 months

Applying test - foreign company must not be regarded as conducting business activities, or non-profit activities – solely on the ground that the foreign company is or has engaged in one or more of the following activities:      

Holding meeting/s within the Republic of the Shareholders or board of the foreign company Establishing or maintaining any bank or other financial accounts within the Republic Establishing or maintaining offices or agencies within the Republic for the transfer, exchange, or registration of the foreign company’s own securities Creating or acquiring any debts within the republic Securing or collecting any debt, or enforcing any mortgage or security interest within the Republic Acquiring any interest in any property within the Republic

External company – needs to register with the Commission within 20 business days after it first begins to conduct activities within SA External company – must maintain at least 1 office in SA – must give details of itself on a prescribed form Commission must then issue a registration certificate to external company on prescribed form

2.8 Domesticated companies  

Domesticated company – foreign company whose registration has been transferred to the Republic in terms of S13(5) to (9) of the Companies Act 2008 Section 13 – a foreign company may apply to transfer its registration to the Republic from the foreign jurisdiction in which it is registered

Requirements for transfer:     

Law of the jurisdiction in which the company is registered must permit such a transfer Transfer must be approved by the company’s shareholder’s Whole or a greater part of that company’s assets and undertaking must be within the Republic Majority of its Shareholders must be resident in the Republic Majority of its directors must be or become SA citizens

Immediately following transfer registration:  

Company must satisfy the solvency and liquidity test Company must no longer be registered in another jurisdiction

S13(7) – even if requirements are satisfied – foreign company may not transfer its registration to the republic if:     

Foreign company is permitted to issue bearer shares, or has issued any bearer shares that remain issued Foreign company is in liquidation Receiver or manager has been appointed (by court or otherwise) in relation to the property of the foreign company Foreign company is engaged in proceedings comparable to business rescue proceedings, or is subject to an approved plan, or court order comparable to an approved business rescue plan An application has been made to a court in any jurisdiction, and not fully disposed of, to put the foreign company into liquidation, to wind it up or to have it declared insolvent...