Law of Enterprise Structures Notes (2021) PDF

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NB - **These notes are from the prescribed material for 2021 (be mindful as the content may have changed since). Most of the sections belowwere taken from our prescribed textbook - “Companies and Other Business Structures” [Davis, D (ed) 2019 Companies and Other BusinessStructures in South Africa (4...

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NB - **These notes are from the prescribed material for 2021 (be mindful as the content may have changed since). Most of the sections below were taken from our prescribed textbook - “Companies and Other Business Structures ” [Davis, D (ed) 2019 Companies and Other Business Structures in South Africa (4th ed; 1st impression) Oxford University Press: Cape Town]** LU1 - INTRO •

LIST 5 DIFFERENT ENTERPRISE STRUCTURES 1. 2.

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Sole trader: owner has total decision making authority; not a separate legal person; no perpetual succession; owner is personally liable without limitation; owner has limited access to capital/limited diversity in skills; and no favourable tax considerations. Partnership: two or more persons who operate a lawful business with the object of making a profit; each partner must contribute something and the partnership must be carried on for the joint benefit of the partners (partnership agreement); possible to have an unlimited amount of partners  greater diversification of skills; generally no legal personality  not a separate entity and their personal assets are exposed; partners jointly enter into all transactions and contracts and all assets contributed and accumulated belong to all partners; the same goes for all partnership debts and claims; no perpetual succession; increased opportunity for accumulation of capital with minimal legal formalities and regulation; each partner is taxed proportionally (on share of the income). Company: registered in terms of the companies act; shareholders contribute money to a company which is used to pursue the object of the business  no limitation on the amount of shareholders who may invest  has the ability to raise a large amount of capital; there is separation of ownership/control (managed by directors), perpetual succession, high degree of legal regulation and potentially very costly to manage; governing document = memo of inc.; separate legal personality = company itself acquires rights duties and obligations  existing outside of its shareholders; does get preferable tax rates; and limited liability on the shareholders. Close Corporation: no new registrations but existing corporations prior to Act still running; separate legal person  assets are owned by corporation and not by members (association agreement); members have a fiduciary duty to the CC; limited liability, however, the CC Act provides circumstances in which personal liability may arise; allows for perpetual succession and exists independently from its owners; max of 10 members; and has characteristics of both a partnership and a company Business Trust: legal arrangement or instrument which is created to hold/manage assets to the benefit of certain individuals or entities; ordinary trust, where there are trustees (people given power in terms of a trust deed) to use the assets of the business trust to run a business; not a juristic person but rather a contract (if formed inter vivos) or something formed in terms of the last will and testament of a deceased person; can provide for perpetual succession (if trust doesn’t have finite lifespan); no limit to the number or trustees or beneficiaries; trustees can be personally liable for losses caused through misconduct or negligence, but beneficiaries cannot be personally liable; ‘trust’ essentially describes the relationship between people and assets.

LIST 5 DIFFERENT FORMS OF COMPANIES (section 8 of the Act) 1. 2. 3.

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Public: Ends in ‘(Ltd)’. ‘For profit’ company. Can be listed on stock exchng  public offering of shares permitted are freely transferable. Private Company: Ends in ‘(Pty) Ltd’. ‘For profit’ company; M.O.I prohibits the offering of its shares to the public and restricts the transferability of its shares. M.O.I sets out its status and in particular, has provisions restricting the transferability of its shares. State Owned Company: Ends in ‘(S.O.C Ltd)’. ‘For profit’ company. Either owned by the municipality or listed as a public entity in terms of the Public Finance Management Act. juristic person under the ownership and control of the national executive that has been assigned financial and operational authority to carry on a business activity. Provides goods and services in accordance with ordinary business principles and is fully or substantially financed from sources other than the National Revenue Fund or tax etc. Personal Liability Company: Ends in ‘(Inc)’. ‘For profit’ company. Used mainly by professional associations such as attorneys, entrepreneurs and stock brokers (want the advantages of corporate personality such as perpetual succession). M.O.I sets out its status and in particular, the directors of such a company are jointly and severally liable for all contractual debts and liabilities incurred. Non-profit Company: Must have at least one public benefit object or an object relating to one or more cultural or social activities or communal or group interests. All assets and income must be used to the further the above-mentioned objectives of the company.

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DIFFERENTIATE BETWEEN AN EXTERNAL VS DOMESTICATED COMPANY An external company is a foreign company that is carrying on business or non-profit activities in SA and is compelled to register with the Commission within 20 business days after it begins to conduct activities in SA. While a domesticated company is a foreign company whose registration has been transferred to SA ito s13(5)-(9) of the Act.

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LIST 10 ELEMENTS TO ADVISE CLIENTS ON THE BEST ENTERPRISE STRUCTURE - SEE TABLE CREATED 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

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Applicable law Different types Separate entity (legal personality) Control Perpetual succession Number of members Personal liability Rights/Duties Financial statements + accounting/auditors Business name

EXPLAIN STOKVELS Informal saving in the African community. Essentially the pooling of money for reasons such as: family savings; investment; parties; property; funeral cover; etc)

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LU2 - PARTNERSHIPS •

DEFINE ‘PARTNERSHIP’ + LIST 4 ESSENTIALIA A contract between 2/more people in which the partners agree to contribute towards the business partnership for their joint benefit and with the object of making a profit  4 essentialia arise from this definition: 1. 2. 3. 4.

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Must be a contribution made by partners (money, property or service); Must be for the joint benefit of the partners; Must have an objective to make profit (however, need not actually make any profit); and Must be legitimate.

DIFFERENT TYPES OF PARTNERSHIP 1.

2. 3. 4.

Universal - partners contribute all property/profits to the partnership, usually for an open ended period, for a wide range of purposes with the commensurate sharing of the profits of their enterprise. Eg marriage icop is a partnership universorum bonorum but can also be extended to commercial undertakings. Particular - usually a more temporary and focused arrangement where partners contribute their resources for a clearly defined purpose or specified objective only and share only in the profits of that particular project. Ordinary - partners are jointly and severely liable for all the debts of the partnership. Extraordinary - liability of partners is limited in some way + 3 types: a. b. c.

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DIFFERENTIATE BETWEEN THE AGGREGATE VS ENTITY THEORY + 2 EXCEPTIONS SA adopts the aggregate theory of partnership, which does not regard the partnership as having separate legal personality from its members. The partners own the partnership property as co-owners and the rights/liabilities of the partnership are also the individual partners’ rights/liabilities  a change of partner destroys the identity of the partnership. 2 exceptions to the lack of legal personality: 1. 2.

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To share in the profits of the partnership; To participate in the management of the business; To compensation; To inspect partnership books; and To a share of the assets upon dissolution.

LIST 8 DUTIES OF PARTNERSHIP MEMBERS 1. 2. 3. 4. 5. 6. 7. 8.

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Insolvency - sequestration of a partners estate is treated as distinct from the estates of the individual members of the partnership. Litigation - a partnership may be sued and may sue in its own name, rather than the names of the individual partners.

LIST 5 RIGHTS OF PARTNERSHIP MEMBERS 1. 2. 3. 4. 5.

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Anonymous partnership - at least one undisclosed partner who is not liable to third parties for any partnership debts but is liable to other partners to the extent agreed between them. Partnership en commandite - undisclosed partners who make a fixed contribution and who are not liable to other parties beyond that fixed commitment. Special partnership - there are both general partners and special partners who are undisclosed and are not liable beyond a specific contribution (registered under a now repealed Act).

To make a contribution towards the partnership; To share in the losses; To exercise care and skill; To fully disclose any relevant information; To account to partnership; To act in accordance with the partnership agreement; To acquire benefits for the partnership; and To guard against a conflict of interest.

LIST 8 WAYS PARTNERSHIP MAY BE DISSOLVED/TERMINATED 1. 2. 3. 4. 5. 6. 7. 8.

Effluxion of time; Ending of undertaking/objective; Mutual termination; Change in membership Insolvency of partnership or any of its members; Notice of dissolution by one of the partners; Court order granted for good cause; and Partners = alien enemies after outbreak of war.

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DIFFERENTIATE BETWEEN THE PRINCIPAL VS AGENT (SCOPE OF AUTHORITY) When a partner contracts on behalf of the partnership, they act both as principal and as a representative (agent) of the other partners.

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DIFFERENTIATE BETWEEN THE ACTUAL VS OSTENSIBLE THEORY The authority of a partner to contract on behalf of the partnership and bind other partners is based on either: actual authority - which may be granted on a partner either expressly or implicitly (in a manner in which they customarily deal with third parties); or ostensible authority - where a partner appears to the outside world to be authorised to act on behalf of the partnership  partners may be estopped from denying such.

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LU3 - CC’S •

LIST 9 CHARACTERISTICS OF CC (LEGAL NATURE) 1. 2. 3. 4. 5. 6. 7. 8. 9.

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6 POINTS DESCRIBING A CC IN RELATION TO COMPANIES ACT 2008 1. 2. 3. 4. 5. 6.

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No new CC’s may be formed; No company may be converted after 1 May 2011; CC’s existing on or before 1 May 2011 may continue indefinitely; Small businesses may now be incorporated as private companies (Pty Ltd); Solvency/Liquidity test applicable; CC may be converted to a company (with written consent from at least 75% of members’ interest in corporation).

LIST 5 POINTS ITO CONVERTING CC TO COMPANY 1. 2. 3. 4. 5.

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Simple to form, relatively cheap/flexible, suitable for small businesses, limited liability entity and less regulation/requirements; May be regarded as a juristic person  it has its own legal personality and has perpetual succession (may be personally liable); No shareholders, only members (members ’ interest) Only natural persons may be members (CC is also considered natural person but may be a shareholder); May have between 1 - 10 members and there is no separation of ownership/control (subject to association agreement); No restriction on the number of employees, turnover or value of assets; Ultra vires doctrine not applicable (should members action fall outside powers granted to them); Governing document = CK form. Association agreement not required - however it is a sensible option for members to legally bind them.

Notice of conversion must be issued (written statement of consent, MOI + filing fee); Every member is entitled to become a shareholder; Juristic personality continues (in the form of the company); All assets, liabilities, rights and obligations now vest in company; Any legal proceedings against company may continue against company + any debts of members/CC become liabilities of company.

LIST 6 POINTS REGARDING MEMBERSHIP INTEREST 1. 2. 3. 4. 5. 6.

On formation of CC, each member must make a contribution (money, property, service); Member  acquires members’ interest (but not required to be proportionate to contribution); Such interest is singular and expressed as a % out of 100; This must be reflected on a certificate of members’ interest (dual function); Members’ interest is incorporeal (intangible/not fixed); Unless agreed otherwise, all rights, duties, liabilities and obligations are proportionate to members’ interest.

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DIFFERENTIATE BETWEEN THE ACQUISITION VS DISPOSAL OF MEMBERS’ INTEREST Regarding acquisition, new members must acquire their members’ interest from an existing member or make a contribution in the form of money/assets/service  when agreed, the interests of existing members are reduced proportionally. Regarding disposal, occurs through the death/insolvency of a member, where interest is sold by way of sale in execution, or termination of membership through court order (subject to association agreement). In all cases, it is subject to the right of pre-emption  interest must be offered to corporation/members first, before any outsiders. In the case of death of member, interest may be transferred to heir with consent of other members. All of the above is subject to any association agreement in place.

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LIST 2 DUTIES OF MEMBERS TOWARDS CC 1. 2.

Fiduciary duty (good faith, etc) Duty of care and skill (what is reasonably expected of member with the necessary knowledge and experience).

Both will be overlooked if written approval of all members is given and they are aware of all of the facts, however, breach of duty will leave a member liable to legal proceedings and/or to pay back whatever was illegitimately obtained or make up for any losses incurred due to breach of duty. •

EXPLAIN CESSATION + 2 MAIN REMEDIES Cessation refers to the ending of CC membership by court order. NB - where the CC is in serious financial difficulty or the members are deadlocked, a court may order the winding up of the CC. Furthermore, the CC Act provides 2 main remedies that members have against one another: 1. 2.

s 36 - termination of offending member’s membership by court order; and s 49 - assistance from the court where members have been guilty of unfair prejudicial conduct.

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EXPLAIN THE PROHIBITION OF LOANS Without express written consent of all CC members, CC may not make a loan to: any members; any other corporation where one or more members together hold more than 50% interest; or to a company or other juristic person controlled by one of more of the CC members. This is to prevent abuse of funds.

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EXPLAIN THE POWER OF MEMBERS TO CONTRACT ON CC’S BEHALF All CC members are agents, even if it has nothing to do with business of the CC - unless member has no power to act or 3rd party would reasonably know this.

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LIST 4 POINTS REGARDING THE PERSONAL LIABILITY OF MEMBERS 1. 2. 3. 4.

s 65 - where there is gross abuse of CC; s 23 - requires name/reg no. on all docs, cheques and orders; s 52 - prohibits loans; and s 64 - where members have acted recklessly/fraudulently

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LU4 - BUSINESS TRUST •

DEFINE ‘TRUST’ + INDICATE THE 3 PARTIES INVOLVED Trust = a legal relationship created in a trust deed  this relationship is created by the founder (donor or settler), who intentionally places assets under the control of another (the trustee) for the benefit of 3rd persons (the beneficiaries). Trustees may also be beneficiaries but these roles must not be confused. Trustee must also be authorised under the Trust Property Control Act to act as a trustee.

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LIST 6 POINTS ON HOW TO FORM A VALID TRUST 1. 2. 3. 4. 5. 6.

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LIST 2 TYPES OF TRUST (ITO TRUST PROPERTY CONTROL ACT) 1. 2.

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There must be the intention by the founder to create a trust and this intention must be expressed in a way that creates an obligation on the trustees to manage and control the assets for the benefit of the beneficiaries; The object of the trust must be lawful; The trust property must be defined with certainty; The trust object must be sufficiently certain; The beneficiaries must be ascertained or ascertainable or the impersonal object must be clearly defined (trust without beneficiaries is not a trust); and At least one trustee should be appointed ito the trust deed or by the Master (trustee must have the capacity and written consent from the Master).

Ordinary trust - the ownership and control of trust assets lies with the trustees (ownership of trust assets = non-beneficial); and Bewind trust - the beneficiary/beneficiaries have ownership of trust assets but these are under the control of trustees.

LIST 3 PURPOSES OF FORMING AN ORDINARY TRUST 1. 2. 3.

Estate-planning purposes; Asset protection purposes; and Business purposes.

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DEFINE A BUSINESS TRUST An ordinary trust in which trustees have been given the power to carry on business and to trade. The terms of a business trust deed can structure the trust to resemble a company or CC, with trustees being given the powers of directors/members while beneficiaries having similar rights to shareholders.

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LIST 2 WAYS IN WHICH A TRUST MAY BE CREATED 1. 2.

By contract - inter vivos trust (formalities prescribed for a valid contract must be followed); or By the will of a testator - testamentary trust (formalities prescribed in the Wills Act must be followed).

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DIFFERENTIATE BETWEEN FAMILY VS BUSINESS TRUST The differences lie in the powers given to trustees and the rights afforded to beneficiaries. Family trusts are likely to give trustees more limited powers and the rights of beneficiaries are unlikely to be transferable (family trusts are formed primarily to protect and preserve assets for future generations).

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DIFFERENTIATE BETWEEN PUBLIC VS PRIVATE BUSINESS TRUST Public trading trust sees members of the public invited to become beneficiaries of the trust upon payment of money or assets. Private trading trusts are formed by entrepreneurs whose intention is to contribute funds towards a business and to use the trust as a vehicle to carry on that business.

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LIST 8 DUTIES OF TRUSTEES 1. 2. 3. 4. 5. 6. 7. 8.

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Fiduciary duty; Act with the necessary care, diligence and skill; Open a trust bank account and keep scrupulous records of trust property; Account to the Master and to the beneficiaries; Act with the utmost good faith; Exercise independent discretion; Invest assets productively; and Act in terms of the trust deed.

IDENTIFY THE RIGHTS OF BENEFICIARIES Beneficiaries have rights as granted in the trust deed, and protection of those rights are found in the Trust Property Control Act. If the trust deed allows it, the rights of a beneficiary may be ceded or transferred. A beneficiary could have: 1. 2.

Vested rights - rights belonging completely and unconditionally to a person as a property interest and cannot be impaired or taken away without the necessary consent; and Discretionary rights - to do with their share of the trust as they please.

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LU 5 – LEGAL PERSONALITY + COMPANIES ACT •

LIST 5 CHARACTERISTICS OF A COMPANY AS A SEPARATE LEGAL/JURISTIC PERSON – section 19 1. 2.

3. 4. 5. •

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Separation of ownership/control – managed by directors...