In May 2011, the Companies Act No. 71 of 2008 was introduced, replacing the Companies Act of 1973 and the Close Corporations Act of 1984. Entrepreneurs initiating new start-ups should be aware of the different types of business entities under which they can now operate. Read on to find out more about these legal business structures…
Profit versus non-profit organisations:
The Companies Act 2008 distinguishes between profit and non-profit companies. A non-profit organisation is incorporated for public benefit, and its income and assets are not to benefit the organisation’s stakeholders, but rather used to pursue the organisation’s charitable goals. Profit companies, on the other hand, exist to generate a profit for its stakeholders.
The Companies Act 2008 specifies the following profit business entities:
- Sole Proprietor
- Private Company – (PTY) Ltd
- Personal Liability Company – Inc
- Public Companies (Ltd.)
- State Owned Companies – SOC
Let’s look at each of these business entities in further detail:
Sole Proprietor – the simplest of business entities, a sole proprietor trades under his/her own name, with no separation of assets and liabilities. For example, Joe Soap, an accountant, trades as Joe Soap Accountants. There being no separation between Joe Soap’s personal assets and liabilities and those of his business, Joe Soap Accountants, he benefits from all the profits and assets accumulated through his business. However, he is also held personally liable for any debts that the business incurs. In other words, his sole proprietorship does not enjoy limited liability.
Unlike sole proprietorships, the following business entities are distinct juristic persons, with a separation being made between the assets and liabilities of the owners/shareholders, and those of the company. In other words, they do enjoy limited liability.
Private Company, or (Pty) Ltd – this business entity may be founded and managed by just one director (known as a One-Man Company), and must have at least one shareholder, but no more than 50. For example, Soap Accounting Services (Pty) Ltd.
Personal Liability Companies (Inc.) – are business entities in which both current and previous directors may be held jointly and severally liable for any debts and liabilities which occur during their time in office. This form of business enterprise is most often used for firms of professionals, such as doctors, lawyers and accountants. For example, Joe Soap’s accounting firm, Soap, Smit and Sithole, Inc.
Public Companies (Ltd.) – are business entities which issue shares, and are often listed on a stock exchange. Public companies are liable to shareholders and management is invested in a Board of Directors. For example, Joe Soap takes his company public, and sells shares on the Johannesburg Stock Exchange. He names this business enterprise Soap Enterprises Ltd.
State Owned Companies (SOC) – are business entities which are either state-owned, like Metrorail, or owned by a municipality, like eThekwini Electricity.
Do I have to register my business?
While sole proprietorships don’t need to be registered, private companies, personal liability companies, public companies and state owned companies need to be registered with the Companies and Intellectual Properties Commission (CIPC), formerly known as the Companies and Intellectual Properties Registration Office (CIPRO).
Can I register my new company as a close corporation?
In the past, close corporations provided small businesses with a cost-effective and simple business entity under which to trade. But, as from May 2011, no new close corporations are being registered by the CIPC.