CHAPTER 2

THE OBJECTIVES OF THIS CHAPTER ARE:

Goal:

The objectives of this chapter are the following:

! for you to understand the difference between the different types of enterprises;

! to allow you to choose between the different types of enterprise;

! to show the different requirements of the different forms of enterprise;

! to understand the sole proprietor;

! to understand the partnership;

! to understand the close corporation;

! to understand the company;

! to teach you the legal aspects on the control of the enterprise;

* * *
TYPES OF ENTERPRISE

The enterprise forms the base of the economic activity. We can choose the type of
enterprise to make sure that we can reduce chaos by having control within the boundaries
of control measures dictated by the law and regulatory measures. By exercising your right
to choose how you want to operate inside these rules, you can still have autonomy over your
decisions.

FACTORS INFLUENCING YOUR CHOICE OF THE FORM OF ENTERPRISE:

The form of enterprise can be chosen to suit definite requirements, circumstances or

aims of the entrepreneur. Although the form of the business can be altered at any
stage, this may be an expensive exercise and can be avoided by the correct choice
at the start.

The following may be used as a guide to assist the entrepreneur, because the
different forms have different implications and influence different aspects.

! The legal individuality of the enterprise. From a point of law, whether the
unit can exist independent and has its own assets and liabilities.

! The accountability of the owner(s) of the business and to what extend the
owner(s) can be held responsible for the outstanding debts and claims against
the business.

! The amount to which the owner(s) maintain control and authority of the
business, the use of assets and the division of profits.

! The ability to, at the start as well as during later expansion, have the capital
available, influenced greatly by the number of owners and their claim on
profits and capital refunding and their direct accountability and control over
the management of the business.

! The possibility of change in ownership of the business, that is how easy or

how difficult it may be for the owner(s), or one of them, to transfer his/her
share in the business to another when he/she moves out of the business either
by own choice or by the other owner(s), persisting in the termination.

2.2
 ! The legal aspects peculiar to the type of business such as formalities during
the setting up of business, instructions that must be adhered to during the
running of the business, and requirements laid down by professional bodies,
if applicable, as well as the accountability to taxation by owner(s).

The following choices are the most common forms of enterprise :

1. Sole proprietor
2. Partnership
3. Close Corporation
4. Company

The form of enterprise is the choice of the entrepreneur and depends on his/her
needs. The choice is important because it can sometimes only be changed at great
expense. This can be avoided by making the right choice on the form of enterprise
at the start.

The following checklist can be used to compare the different forms of business and
assist the entrepreneur in his/her decision of choice on the form of business:

a. The number of members (co-owners).

b. Founding procedures.
c. Legal accountability
d. Management.
e. Name of business.
f. Change of policy.
g. Provision of capital.
h. Income tax.
i Transfer of rights.
j. Continuation of existence.

ASSIGNMENT

You want to set up a business, doing civil engineering construction. The work you intend
doing will be water reticulation and stormwater drainage in new urban development in the
Western Cape area.

2.3
Investigate the setting up of a business as an sole proprietor along the lines set up in the
check list.

A proper bibliography must be supplied on the references you consult.

2.4
OWNER'S EQUITY AND THE FORM OF ENTERPRISE
INTRODUCTION
An individual (the entrepreneur) can establish a sole proprietorship easily and practically
without having to satisfy any statutory requirements. He can arrange it into departments,
trade through agents and establish branches.

In conjunction with other entrepreneurs he may form a temporary or

permanent partnership, which can have the same departmental, branch and
agent structure. Larger groups of owners may also form close corporations
or companies, which can also have the same trading structure as sole
proprietorships and partnerships.

Companies can also be in association with other companies, referred to as

associated or affiliated companies. If they hold the controlling interest in
another company, that company is known as a subsidiary of the holding
company.

1 THE SOLE PROPRIETORSHIP

The individual wishing to start a business does not encounter too many obstacles -
usually only a trading licence is required. Anyone rendering professional services
must also comply with the admission requirements set by the professional body
concerned.

All the decisions are made by the individual, to whom all the profits (losses) accrue.
He alone is personally responsible for all the enterprise's liabilities and is the sole
owner of the assets.

The owner's equity of a sole proprietor consists of the capital introduced plus profits
earned, less any losses suffered and any amounts withdrawn from the enterprise.

2.5
2 THE PARTNERSHIP
Introduction:
A partnership is a legal relationship created by agreement between two or more, but
not more than 20 persons. According to this agreement each person contributes to
a lawful enterprise for the purpose of making a profit, which is to be divided among
the partners. An analysis of this description will reveal that the essential
requirements for the formation of a partnership are the following:
! There must be a valid agreement
! According to which each partner contributes something
! With the purpose of making a profit
! Which will be to the mutual advantage of all the partners

The formation of a partnership requires no formalities - for instance no written

agreement is required - but it is customary and preferable for the agreement to be in
writing. Thus the agreement can be written, oral or tacit, that is by conduct.

2.1 LEGAL POSITION OF PARTNERSHIPS

Common law principles apply. A partnership is not a legal person and has
no independent legal existence separate from that of it's constituent members.
The partners are jointly and severally responsible for the rights and
obligations of the partnership - in other words they have mutual rights to all
the assets and are jointly responsible for all the obligations.

If the number of members exceeds 20 the partnership becomes invalid and

ceases to have any legal existence.

2.2 THE PARTNERSHIP AGREEMENT

As has already been stated, the agreement should preferably be in writing.
The contents of such an agreement will depend on individual circumstances.
Where an agreement is silent on any specific aspect, common law principles
will apply. For example, according to common law, partners have equal
rights in the management of the enterprise and their ownership in the
enterprise is in the same ratio as that governing the distribution of profits.

A partnership agreement should specify the following essential aspects:

! The names of the parties forming the partnership.
! The purpose, nature and scope of the partnership.

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 ! Name of the partnership.
! Location of the business.
! Date of formation and expected duration of the partnership.
! Contribution made by each partner.
! Rights, powers and duties of each partner, as well as any restriction
there on.
! Decisions concerning the financial year, books and records.
! The ratio of profit and loss distribution, including any special
provisions for recognising differences in capital contributions
(interest on capital) and services rendered by partners (salaries).
! Specifications covering withdrawals by partners.
! Specifications in respect of life insurance for partners, treatment of
insurance premiums and proceeds of policies.
! Specifications relating to the retirement, admission or death of
partners and dissolution of the partnership.
! Procedures for settling any disputes between partners.

2.3 PARTNERS' CONTRIBUTIONS

Each partner is expected to contribute something to the partnership. These
contributions need not necessarily be of the same nature; they may consist of
cash, labour, skills or knowledge. The amount, whatever its form, that a
partner contributes to the enterprise is his capital invested in the enterprise.

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2.4 RELATIONSHIPS BETWEEN PARTNERS AS SUCH AND WITH THIRD
PARTIES
Unless otherwise specified by the agreement, a partner has no right to a
salary or compensation for his services or to interest on his capital. However,
the partners may determine by mutual agreement any relationship they
consider necessary, for example that one or more partner should be denied
the right of management or granted only restricted powers, or that on
dissolution the assets should be distributed in a specified ratio, or that a
specific profit-sharing ratio should apply. The agreement may even specify
that losses are to be shared in a ratio different from that governing the
distribution of profit. A partner may also be guaranteed a minimum profit.

Partners must show the highest degree of good faith towards each other and
must manage the interests of their mutual business as if it were their own. No
partner has the right to enrich himself at the expense of the partnership, or to
allow his own interests to take precedence over those of the partnership.

Because a partnership is not a legal entity, any action against a partnership

must be instituted against all the partners personally. The partners are jointly
responsible and therefore must be sued as such. Similarly, partners must
institute any action against a third party jointly.

If a partner commits a crime in promoting the interests of the partnership, all

the partners will be deemed to be guilty unless they can prove that they had
no part in and were unable to prevent the crime.

A partnership does not constitute a tax entity. There is on such thing as

partnership tax - the individual partners are taxed in their personal capacities
on the profits of the partnership.

2.8
2.5 DISSOLVING A PARTNERSHIP
Partnerships may be dissolved for one of the following reasons:
! Voluntary action by the partners (mutual agreement, change in the
membership of the partnership by agreement).
! The unilateral action of one partner (a partner may unilaterally declare
the partnership dissolved, but this may render him liable to breach of
contract, depending on the circumstances).
! Legal process (death of a partner, insolvency of the partnership or of
a partner, or when a partnership has more than 20 members).

When a partner retires, for whatever reason, the partnership ceases to exist.
The remaining partners may continue their enterprise, but must form a new
partnership. The admission of a new partner, even where the previous
membership remains intact, also entails the dissolution of the earlier
partnership and the formation of a new one.

2.6 INSOLVENCY OF A PARTNERSHIP

The court may sequestrate a partnership's estate either at the request of the
partners, that is voluntary sequestration, or at the request of a creditor, that
is compulsory sequestration. In both cases the private estates of each partner
must also be sequestrated.

A partner's equity consists of the capital he has contributed plus any profit (or
loss) apportioned to him, less any withdrawals he may have made.

2.7 EXTRAORDINARY PARTNERSHIPS

Most partnerships are "general partnerships" in which the partners bear
unrestricted responsibility for their firm's debts. There are, however, certain
exceptions.

In a limited partnership the partners liability for the partnership's debts is

limited to the amount of the capital they have undertaken to contribute to the
partnership. Further, a sleeping partner is excluded from the management of
the partnership by agreement. A commandate partner is both a sleeping
partner and a limited partner.

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 These extraordinary partnerships have one characteristic in common; the
extraordinary partner is a partner only in the eyes of the other partners. An
extraordinary partner may not act in the capacity of a partner, nor present
himself as such to third parties. This type of partnership is seldom
encountered today.

2.8 CHARACTERISTICS OF THE PARTNERSHIP AS A TYPE OF

ENTERPRISE
! Ease of formation and dissolution: As has already been noted, a
partnership is formed by mutual agreement between two or more
parties. Dissolution is effected by either oral or written notice given
by a partner to his fellow partners.
! Relative flexibility: Changes in the capital structure of a partnership
or important policy changes within the firm are readily affected by
mutual agreement of the partners.
! Personal nature of a partnership: Especially in the case of
professional practices, a partnership presents a more personal image.
To the public this implies a closer link between ownership and
management and consequently a high degree of responsibility.
! Personal responsibility: As has already been mentioned, partners are
jointly and severally responsible for all the debts of the partnership.
An ordinary partner may be obliged to contribute considerably more
than his original capital should the partnership be sequestrated.
! Lack of continuity: The dissolution of a partnership each time a
change in its membership occurs may cause third parties to feel less
secure than when dealing with a company, for example. In practice
a partnership frequently continues without disruption, despite changes
in membership.
! Limited transfer of ownership: A partner may not transfer his rights
in a partnership without permission from all the other partners.
! Restrictions on the raising of loan capital: A partnership may
experience greater difficulty in obtaining finance than a public
company, but there is little difference between a partnership and a
private company in this respect. Partners are required to assume
personal responsibility for loans. In practice banks and financial
institutions also require the directors and shareholders of a private

2.10
 company to stand surety for such a loan, and therefore to forfeit the
advantage of limited liability.
! Income tax: Since a partnership is not a legal entity, it is not liable for
income tax. The profit of a partnership is taxed in the hands of the
partners. Thus each partner is taxed on his portion of the partnership's
profit according to the progressive sliding scale pertaining to
individuals.

3 CLOSE CORPORATIONS
Introduction:
Since 1 January 1985 it has been possible to incorporate close corporations in terms
of the Close Corporations Act, 1984. Regulations issued in November 1984 and
relating to certain administrative and other matters affecting close corporations
(hereafter referred to as CC's) must be read in conjunction with the Act.

The CC Act is intended to provide a less complex and more easily administered
alternative to a private company as a means of conducting business as a separate
legal entity and is aimed specifically at smaller business enterprises.

The administration of corporations falls under the control of the Registrar of Close
Corporations, and on payment of the prescribed fee all documents in his possession
are available for public inspection.

Prescribed documents that must be submitted to the Registrar have been pre-
prepared, minimised and it is relatively inexpensive to register. Currently these
forms are the following:
! CK1 Founding Statement.
! CK2 Amended Founding Statement.
! CK3 Application for Restoration of Registration.
! CK4 Application for Conversion.
! CK5 Court Alteration to, Replacement of, Addition to Founding Statement.
! CK6 Voluntary Liquidation.

3.1 CHARACTERISTICS OF A CLOSE CORPORATION

As is the case with companies limited by share capital, a CC makes it
possible for smaller enterprises to obtain legal status, with a legal identity
independent of its members and with limited liability and unlimited

2.11
 existence. However, because the CC Act avoids much of the administrative
complexity associated with companies with limited liability, a CC is simpler
and less expensive to operate. A characteristic of the CC Act is that it is
intended to be largely self-regulatory and members may lose their limited
liability and be jointly and severally responsible for the debts of the CC if
they violate certain provisions of the CC Act.

The main requirement of the CC Act is that a corporation should comply with
specific solvency and liquidity requirements whenever certain payments are
made. The corporation can satisfy these solvency and liquidity requirements
provided that:
! If, after such payment is made, the corporation's assets, fairly valued,
exceed all its liabilities.
! The corporation is able to pay its debts as they become due in the
ordinary course of its business.
! In these particular circumstances, such payment will not in fact render
the corporation unable to pay its debts as they become due in the
ordinary course of its business.

A CC is suitable for an undertaking which is owned by a few people who are

all actively involved in the operation of the business. In terms of the CC Act,
the members are all entitled to participate in the management of the business
and to act on behalf of the corporation. In contrast with companies, no
distinction is made between the owners and management of a cc.

A close corporation:
! Becomes a juristic person on formation and has the capacity and
powers of a natural person of full capacity in so far as a juristic person
is capable of having such powers or of exercising such powers.
! Exists indefinitely and remains a juristic person irrespective of any
changes in its membership.
! Provides members with limited liability.

3.2 FORMATION
A CC is formed as soon as a "Founding Statement" is registered with the
Registrar. The Founding Statement must contain the following:
! The full name of the corporation.

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 ! The principal business to be carried on by the corporation.
! The postal and physical address of the registered office of the
corporation.
! The full name of each member and his identity number.
! The size, expressed as a percentage, of each member's interest in the
corporation.
! Particulars of the contribution of each member.
! The name and postal address of the accounting officer (person or
firm).
! The date of the financial year end of the corporation.

The Founding Statement replaces the Memorandum of Association and the

large number of registers which are applicable to a company. Corporations
must display their full registered names with the addition of CC (or BK), as
well as their registration number, on the outside of their business premises
and on all:
! Notices and other official publications, including advertisements.
! Bills of exchange, promissory notes, endorsements, cheques and
orders for money, goods or services purporting to be signed by or on
behalf of the corporation.
! Letters, delivery notes, invoices, receipts and letters of credit of the
corporation.

Every business letter sent by the corporation to any person must contain the
names (or initials) and surnames of each member of the corporation.

3.3 LIQUIDATION AND WINDING UP

The requirements for liquidation and winding up are similar to those laid
down by the Companies Act and the Insolvency Act and generally are similar
to the requirements applied in company law.

3.4 MEMBERSHIP OF A CLOSE CORPORATION

A CC may have a minimum of one and a maximum of 10 members. The
general principle is that only natural persons may be members of a C.
Juristic persons may also be members in the following circumstances:

2.13
! A juristic person who is trustee of a testamentary trust is entitled to a
member's interest, provided that such juristic person is not directly or
indirectly controlled by any beneficiary of the trust.
! A juristic person who, in the case of a member who is insolvent,
deceased, mentally deranged or otherwise incapable or incompetent
to manage his affairs, is a trustee of his insolvent estate or an
administrator, executor or curator in respect of such member or is
otherwise a person who is his duly appointed legal representative.

2.14
3.5 CONTRIBUTION AND INTEREST OF A MEMBER
Every person who is to become a member of a corporation, must make an
initial contribution, particulars of which must be stated in the Founding
Statement. This contribution can be money or other assets or services
rendered in connection with and for the purpose of the formation of the
corporation. It may not be in the form of future services (for example, future
value of free accommodation, interest-free loans, future consultations or
management services).

The interest of any member in a corporation is a single interest expressed as

a percentage. The term "single interest" means that two or more persons may
not be joint holders of a member's interest in a corporation. There is no
requirement that the member's percentage interest must be in relation to his
share of total members contributions. A member's interest generally
represents his right to share in the income of the corporation. This right may,
however, be varied in accordance with the terms of an association agreement.

A new member may obtain his member's interest by:

! Buying it from one or more of the existing members.
! Making a contribution to the corporation, in which case the
percentage of his member's interest is determined by agreement with
the existing members. The contribution may consist of an amount of
money or any property at a value agreed upon by the new and existing
members.

A corporation may give financial assistance to any person for the purpose of
acquiring his member's interest. The opposite applies to a company which,
by virtue of the maintenance of capital concept, is not allowed to offer such
assistance. However, the assistance offered to a new member is controlled
in that the corporation:
! Must obtain prior written approval from all existing members.
! Must satisfy the solvency and liquidity requirements of the Act.

The close relationship between members is recognised by the CC Act. If any

member wishes to dispose of his interest or part thereof, he may do so only
with the consent of all the other members or in terms of the conditions of the
association agreement.

2.15
 If a member should be declared insolvent, the trustee of his insolvent estate
may sell his member's interest to the corporation, the other members or a
third party (in the latter case, subject to certain conditions).

Subject to any other arrangement in the association agreement, the executor

of the estate of a deceased member may transfer the deceased member's
interest to his legatee or heir only if all remaining members of the corporation
agree to the transfer. If this consent is not given within 28 days, the executor
must sell the interest to the corporation, the remaining members or a third
party.

The corporation can buy a member's interest, provided that it complies with
the written consent and solvency and liquidity requirements of the CC Act,
and although it may buy a member's interest, it may not keep such an interest.
Any interest purchased in this way must immediately be added to the interest
of the remaining members, either proportionally or as per agreement.

3.6 LIMITED LIABILITY OF MEMBERS

According to the CC Act, members are not liable for the obligations of the
corporation simply on account of their membership. Certain transgressions
may result in their losing their limited liability and becoming jointly and
severally responsible for the debts of the corporation. The circumstances
under which members may lose the protection of limited liability are:
! Where transactions are concluded in the corporation's name without
the use of the abbreviation CC (or BK).
! Where the contributions specified in the Founding Statement are not
made.
! Where the number of members exceeds 10 for a period of six months.
! Where the office of the accounting officer of the cc is vacant for six
months.
! Where they participate in the management of the cc while being
incapacitated in this respect.
! Where the business of the corporation is carried on recklessly, with
gross negligence or with the intent to defraud.

2.16
 ! Where certain payments are made to members although the
corporation does not satisfy the solvency and liquidity requirements
of the Act.
! Where a corporation is deregistered while having outstanding
liabilities. All members and previous members will be jointly and
severally liable for any debts incurred by the corporation while they
were members.
! Where a juristic person holds a member's interest of which he is not
entitled. Such juristic person and any nominee will be liable for every
debt of the corporation incurred during the time of such
contravention.

The loss of limited liability under the above conditions affords creditors some
protection.

3.7 INTERNAL RELATIONS

Each member stands in a fiduciary relationship to the corporation and must:
! Act honestly and in good faith and in particular shall exercise the
powers which he has in the interests and for the benefit of the
corporation, and not exceed these powers.
! Avoid any material conflict between his own interests and those of the
corporation and notify all members of the nature and extent of any
material interest which he may have in any contract with the
corporation.

The members of a corporation may enter into a written association agreement

which regulates any matter, including the internal relationship between
members, provided that this is not inconsistent with the provisions of the Act.
New members of the corporation will be bound by an existing association
agreement as if they had signed as party thereto. According to the CC Act,
the following rules will apply to internal relations, unless the association
agreement provides otherwise:
! Every member is entitled to participate in the carrying on of the
business.
! Every member has equal rights with regard to the management of the
corporation.

2.17
 ! Written consent of 75% of members is required for any change in the
principal business of the corporation, the disposal of the whole, or
substantially the whole undertaking of the corporation, the disposal
of all, or the greater portion of the assets of the corporation, and any
acquisition or disposal of immovable property by the corporation.
! Differences between members regarding matters relating to the
corporation are resolved by majority vote.
! Each member's number of votes corresponds with his percentage
interest in the corporation.
! A corporation must reimburse any member for expenses incurred by
him in the ordinary and proper conduct of the business of the
corporation and anything done with regard to maintenance of the
business or property of the corporation.
! Payments to members by reason only of their membership must be
those amounts agreed upon and effected at such times as the members
from time to time agree upon, providing that the corporation meets the
solvency and liquidity requirements of the Act. Such payments must
be in proportion to their respective interests in the corporation and
include payments to members in the ordinary course of business, for
example salaries, interest, rent or repayments of loans.

A corporation should not, without the prior written consent of all the
members, make a direct or indirect loan to provide security for:
! Any of its members.
! Any corporation in which one or more of its members jointly holds
more than a 50% interest.
! Any company controlled by one or more members of the corporation.

3.8 EXTERNAL RELATIONS

Any pre-incorporation contract entered into by an agent or trustee of the
corporation can be ratified by the corporation:
! By the written consent of all the members.
! Within the time specified in the contract, or if no time is
specified, within a reasonable time after incorporation.

A corporation has no equivalent to the directors of a company. Each member

is responsible for the operations of the corporation and has an equal right to

2.18
 participate in its management. Each member is an agent of the company in
respect of business transacted with third parties in the normal course of
business and has the power to bind the corporation.

4 THE COMPANY
Introduction:
An enterprise which has a legal personality, that is an incorporated enterprise, on the
other hand, has legal capacity and may own property, incur debts and enter into legal
transactions in its own right, as if it were a person. Companies and CC's fall into
this category.

A company may be described as a group of people (as in the case of a partnership)

co-operating it make a profit. A company, however, is a legal person, it is
incorporated according to legislation, and is an entity independent from its owners,
who are called members. Therefore the company has existence, independent of the
existance of the members and has in it's own right obligations and rights.
In South Africa all issues pertaining to companies are governed by the Companies
Act, 1973 (Act 61 of 1973) pertaining to companies are governed by Companies
Act, 1973 (Act 61 of 1973).
Companies, as a form of enterprise, came into being to meet the need for:
! A means of acquiring more capital than is possible for a sole proprietor or a
partnership.
! A means of ensuring the continuity and permanence of the enterprise.
! A convenient method of exchanging ownership.
! A procedure to limit the financial responsibility of owners.

4.1 SHARES AND SHAREHOLDERS

In order of raise capital, a company issues shares to investors in the company.
By purchasing shares an investor becomes a shareholder, or member of the
company, and thus acquires owner's equity in the company.

Any person with contractual capacity, including other legal persons, may
become a member of a company, this means that one company, since it lacks
legal personality and has no independent existence.

4.2 RIGHTS AND DUTIES OF SHAREHOLDERS

2.19
 4.2.1 Change in ownership: A member's interest in a company depends on
the number of shares he holds in that company. Since shares are
negotiable documents, each member has the power to sell his shares
or a portion thereof to other persons with contractual capacity, or to
buy additional shares from such persons.
In the case of a public company, trading in shares is done on a stock
exchange, with a stockbroker acting on the instructions of the
shareholder.
4.2.2 Right to vote: A shareholder has a right to vote on policy matters at
Annual General Meetings. His voting rights are proportional to the
number of shares he holds. Shareholders also appoint directors to
manage the company on their behalf.
4.2.3 Distribution of profits: Unless otherwise specified, the shareholder is
entitled to a proportional share of only those profits which have been
declared as dividends.
4.2.4 Right of assets: Unless otherwise specified, a shareholder has the
right, upon liquidation of the company, to share proportionally in the
distribution of assets after all creditors claims have been met.

4.3 FORMATION AND MANAGEMENT OF A COMPANY

4.3.1 Formation
One or more persons must take the initiative to form a company.
They are known as the founders of the company. In order to form a
company they must comply with the prescribed procedure for
registration as laid down by the Companies Act. Briefly, this
procedure is the following:
! The memorandum and articles of association are drawn up,
usually with the aid of an attorney.
! Then the articles of association and memorandum are
submitted, together with other prescribed forms, declarations
and fees, to the Registrar of Companies.
! The company is formed when the Registrar certifies on the
memorandum and the articles of association that the company
has been incorporated.
! The Registrar then issues the company a certificate to
commence business.

2.20
 The most important aspects set out in the memorandum are:
! The purpose of forming the company, as well as its principal
business activity.
! The name of the company.
! Particulars of the share capital with which the company is
registered.

In addition, the company's registered offices and postal address, and

the name of its auditors must be indicated in the prescribed manner.

A company's external characteristics are largely determined by the

memorandum, while its internal affairs and management are regulated
by the articles of association. The rules laid down control matters
pertaining to shares, the transfer of shares, authority to borrow,
meetings, voting rights, powers and duties of directors, etc.

4.3.2 Management: The management of a company is vested in the board

of directors appointed by the shareholders in accordance with the
Companies Act and the statutes.

The board of directors is the coordinating force of the company and

its policy maker. The directors are not usually involved in the routine
daily activities of the company, they delegate these responsibilities to
management and its staff.

4.4 TYPES OF COMPANIES

Companies with share capital can be one of two types:
! Public companies.
! Private companies.

The name of a public company ends in Limited", while that of a private

company ends in (Proprietary) Limited. The minimum number of members
for a public company is seven, while a private company may have only one
member.

When a small group of entrepreneurs who are able to provide the capital for
an undertaking themselves form a company, they usually form a private

2.21
company. The general public cannot become members of a private company,
therefore the latter enjoys certain privileges not accorded to public companies
in terms of the provisions of the Companies Act.

A private company can be considered to be a partnership in the form of a

company. The statutes of a private company impose the following
limitations:
! The transfer of shares is restricted.
! The number of members is limited to 50.
! The public cannot be invited to subscribe for shares or debentures.

A public company is not subject to these limitations.

The owner's equity of the shareholders consists of the share capital plus the
reserves, including the retained income, of the company.

Profit distribution and allocation will be determined by the form of enterprise

and the decision of the owner(s). In the case of a company, this decision
rests with the management of the company, subject to the approval of the
members.

2.22
THE DIFFERENCE BETWEEN COMPANIES, PARTNERSHIPS AND CLOSE
CORPORATIONS & SOLE PROPRIETORS
The following table shows the basic differences between the four forms of enterprise.

Characteristic Sole proprietor Partnership Company Close

corporation
1. Number of One - the owner Two or more, but Public company: One or more,
members not more than 20 seven or more - no with maximum of
limit. ten.
Private company:
one or more -
limited to fifty.
2. Formation Simple, only Simple. Preferable Strict Specific
permits/ licences to have a requirements in requirements, but
depending on the partnership terms of uncomplicated.
type of business/ agreement. Companies Act. Founding
occupation. Certificate to statement and
commence registration
business required. certificate
required.
3. Legal entity Not a separate Not a separate A legal entity. A legal entity.
legal entity. legal entity. Liability of Limited liability
Owner liable for Partners are shareholders in provided that
obligations of the jointly and both types of prescribed
undertaking. severally liable for company limited solvency and
debts. to amount liquidity
invested in shares. requirements are
met.
4. Management Management by Management by Public company: All members
the owner. owners. Joint Must have two or participate in
Responsibility and responsibility and more directors. management
control rests with control. Private company: unless association
the same person. Must have at least agreement
one director. stipulates
otherwise.
5. Name of No legal No legal Public company: Name ends with
undertaking requirements. requirements. Name ends with CC
"Limited". (BK Afrikaans)
Private company:
Name ends with
"(Propriety)
Limited".

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6. Policy of Unlimited in the With common Limited - By mutual
capital constraints of the consent. Approval of agreement.
undertaking. directors and
shareholders
required.
7. Provision of Limited to capital Limited to the Public company: Limited to
capital contribution of number of Obtain capital members
one person - the partners and their through the issue contributions in
owner. personal of shares to terms of members
contributions. members. interest in the
Private company: corporation.
Obtains capital
through the issue
of shares to
founders.
8. Income tax Profit of the Each partner pays Company pays tax CC are taxed at
undertaking individually on his on profits. company rates.
regarded as shares of the Shareholders Members are not
personal income profit. taxed on taxed on profits
of the owner and dividends received distributed.
taxed accordingly. from company.
Private co no tax
on dividends
Public co double
tax on profit &
dividends.
9. Transfer of Not transferable. Not freely Public company: Members may
rights transferable - Freely traded and transfer their
consent of transferred. interest with the
partners a Private company: consent of all the
prerequisite. Consent of fellow other members.
shareholders An amended
required for a founding
transfer. statement is
required.
10. Continued Theoretically the If a partners Unlimited Unlimited
existence undertaking withdraws, the existence except existence except
ceases to exist partnership is for liquidation. for deregulation
when the owner dissolved and a or liquidation.
dies, although this new partnership
is not always the must be formed.
case in practise.

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