Business and Investment vehicles

When considering the commencement of business or investment in South Africa, one needs to consider which vehicle will be best suited to the circumstances. Factors to be taken into account include the number of participants in the business, how the business is to be operated from a management and control point of view, achieving limited liability for participants, the requirement of perpetual succession and, importantly, income tax considerations.

Business and Investment vehicles
Source: Cliffe Dekker
2.1
INTRODUCTION
 
2.1.1
When considering the commencement of business or investment in South Africa, one needs to consider which vehicle will be best suited to the circumstances. Factors to be taken into account include the number of participants in the business, how the business is to be operated from a management and control point of view, achieving limited liability for participants, the requirement of perpetual succession and, importantly, income tax considerations.
 
2.1.2
There are a number of different investment methods and vehicles available in South Africa. These are:
 
 
2.1.2.1
a company – either a local private or public company or a "branch" of an external company;
 
 
2.1.2.2
a close corporation;
 
 
2.1.2.3
a partnership – either limited or unlimited;
 
 
2.1.2.4
a business trust; and
 
 
2.1.2.5
the sole proprietor.
2.2
COMPANIES
 
2.2.1
In South Africa, companies are formed in terms of and governed by the Companies Act, 1973. From the date of incorporation of a company, a separate legal entity is in existence. The shareholders enjoy limited liability. The company continues in existence irrespective of the change in shareholding from time to time. Both natural and juristic persons can hold shares in a company.
 
2.2.2
In addition to shareholders (who do not generally participate in the active management of the company), each company has a board of directors. The directors are appointed by the shareholders.
 
2.2.3
Companies are formed with a share capital. Different classes of shares can be created (for example, ordinary, preference, redeemable or convertible shares, or a combination thereof). Debentures can also be issued in a company.
 
2.2.4
Other than in limited circumstances, the company cannot provide financial assistance for the acquisition of its own shares. An example of permitted assistance is in the case of a share incentive scheme. Companies can also buy back their own shares, subject to liquidity and insolvency requirements and the provisions of the Companies Act.
 
2.2.5
A company needs to disclose a director's nationality on company documents. There is no requirement that a shareholder or director must be South African. There are however ancillary consequences if the shareholders are foreign (for example, limitation of local borrowings, thin capitalisation rules and anti-transfer pricing provisions may apply).
 
2.2.6
The company must have a South African "public officer". The public officer is primarily responsible for ensuring that the company submits its tax returns timeously.
 
2.2.7
An auditor must be appointed.
 
2.2.8
Companies are currently taxed on a flat income tax rate of 29% plus 12.5% Secondary Tax on Companies (on the payment of dividends) ("STC") on the difference between dividends declared and dividends received. In addition, a company is taxed on 50% of its net capital gain.
 
2.2.9
Private Companies
 
 
2.2.9.1
Only one person is required to form a private company. The name of the company ends with "(Proprietary) Limited".
 
 
2.2.9.2
The articles of association (the constitutional documents for incorporation) of a private company must:
 
 
 
2.2.9.2.1
limit transferability of shares;
 
 
 
2.2.9.2.2
limit the number of shareholders to 50; and
 
 
 
2.2.9.2.3
prohibit any offer to the public to subscribe for shares or debentures in the company.
 
 
2.2.9.3
A private company unlike a public company is not required to file financial statements with the Registrar of Companies.
 
2.2.10
Public Companies
 
 
2.2.10.1
Public companies require at least seven members. The name of the company ends with "Limited". There is no restriction on the number of members or the transferability of shares. The public company can thus be used as a vehicle for raising capital from the public. Only public companies can be listed on the JSE Securities Exchange South Africa.
 
 
2.2.10.2
There are disclosure requirements for public companies that include the submission of annual and interim financial statements to the Registrar of Companies. These statements are available to the public for scrutiny.
 
2.2.11
Section 53 (b) Company
 
 
Section 53(b) of the Companies Act makes provision for a special type of private company. It is usually used for professional associations, such as attorneys and accountants. The name of the company ends with "Incorporated". The articles of this company provide that the directors will be liable jointly and severally with the company for liabilities incurred by the company while such persons were directors.
 
2.2.12
External Companies
 
 
2.2.12.1
A foreign company wishing to conduct business in South Africa in its own name through a branch must register as an external company within 21 days of establishing a place of business in South Africa. It is to be noted that as soon as a foreign company conducts any form of business in South Africa (and this includes owning immovable property) the requirement to register as an external company becomes applicable. There is no separate existence from the foreign head office.
 
 
2.2.12.2
An external company must comply with the provisions of the Companies Act, including the submission of statutory returns and the filing of annual financial statements with the Registrar of Companies, where they are open to public scrutiny.
 
 
2.2.12.3
There is no separate board of directors for the external company, by contrast with a local private company. The external company must appoint an auditor practising in South Africa.
 
 
2.2.12.4
An external company may be converted to a local private company, subject to certain requirements.
 
 
2.2.12.5
The external company will be taxed at a flat rate of 34%, but no STC is payable. An external company is taxed on 50% of its net capital gain.
2.3
CLOSE CORPORATIONS
 
2.3.1
The concept of a close corporation was introduced in 1985 as a simpler less expensive corporate entity for the single businessperson or small groups of entrepreneurs. The maximum number of members permitted in a close corporation is ten.
 
2.3.2
This vehicle is not appropriate for corporate investors as only natural persons may hold an interest in a close corporation.
 
2.3.3
The close corporation exists separately from its members who enjoy limited liability. The close corporation enjoys perpetual succession, notwithstanding a change in members. There is no share capital – the interest is in the form of a member's interest expressed as a percentage.
 
2.3.4
There is no separate board of directors – the members manage and own the close corporation.
 
2.3.5
Close corporations are treated the same as companies for tax purposes. Close corporations do not need an auditor, only an "accounting officer".
2.4
PARTNERSHIPS
 
2.4.1
Partnerships are not governed by statute. A partnership may be formed between at least two persons. In terms of the Companies Act, no unincorporated company, association or partnership may include more than 20 people (other than for certain professional partnerships).
 
2.4.2
There are no specific formalities required to form a partnership. While an agreement is usually entered into, the conduct of the parties may imply a partnership.
 
2.4.3
The requirements for a partnership are the following:
 
 
2.4.3.1
two or more persons agree to act jointly;
 
 
2.4.3.2
each makes a contribution;
 
 
2.4.3.3
the objective of the partnership is to make a gain; and
 
 
2.4.3.4
the profits of the partnership are divided between them.
 
2.4.4
No registration of a partnership is required. The formation procedure is thus flexible and informal.
 
2.4.5
A partnership does not have a separate legal personality from the partners. Each partner in an ordinary partnership is liable jointly and severally for the debts and obligations of the partnership. If a partnership is sequestrated, so too are the individual estates of the partners concerned. Should a partner however undertake to pay the partnership debt and provide security therefor, the partner's private estate can avoid sequestration.
 
2.4.6
Due to the liability of partners, certain forms of limited partnerships can be created. Limited partners are usually only partners insofar as their internal relationship is concerned and are not also liable viz a viz third parties. The limited partner is not usually allowed to participate actively in the business or to hold itself out as an ordinary partner to outsiders and only enjoys protection from liability for so long as it does not act as an ordinary partner. Limited partnerships can be in two forms:
 
 
2.4.6.1
a silent partnership – the silent partner is not represented as a partner in the partnership and does not act for the partnership. It is thus afforded protection against third parties from personal liability for the partnership debts. It does however share full risk of the enterprise and remains liable to its co-partners for debts of the partnership; and
 
 
2.4.6.2
an en commandite partnership – this limited partnership is identical to a silent partnership, save that the partner en commandite limits its liability to its co-partners for the losses of the partnership to an agreed amount, on condition it receives a fixed share of the profits.
 
2.4.7
Partnerships are flexible and are often used as joint venture vehicles.
 
2.4.8
Many people make a distinction between the concept of a partnership and the term "joint venture". Even though many joint venture agreements explicitly state that a partnership is not created, if all the elements of a partnership are present, a partnership is created in law and treated as such.
 
2.4.9
Each time there is a change in partners (due to death, insolvency or otherwise), the partnership terminates. There is no perpetual succession.
2.5
BUSINESS TRUSTS
 
2.5.1
In South Africa, the Trust Property Control Act, 1988 governs the formation and operation of trusts. Through a trust, a business can be carried on by trustees for the benefit of nominated beneficiaries.
 
2.5.2
The trust affords limited liability in that neither the trustees nor the beneficiaries are liable for the obligations thereof.
 
2.5.3
The trust does not have a separate legal personality (other than for taxation purposes). The trust assets vest in the trustees who hold them for the benefit of others.
 
2.5.4
A trust is usually formed by means of a trust deed that needs to be lodged with the Master of the High Court. No trustee can act in the capacity of a trustee until a written authorisation is obtained from the Master. Security can be requested by the Master, but exemption is usually granted.
 
2.5.5
The benefit of a trust is that the onerous provisions of the Companies Act do not apply. A trust need not submit financial statements and does not have to appoint an auditor. There is no limit on the number of trustees or beneficiaries that are permitted.
 
2.5.6
There are income tax benefits in making use of a trust. Where income is distributed by a trust, it is considered the income of the recipient and is taxed in the hands of the recipient, and not the trust. In this way, effective splitting of income can be achieved, subject to the tax avoidance provisions of the South African income tax legislation. Distributions to beneficiaries of profits of the trust are not subject to STC, as with companies and close corporations. A trust is taxed on 40% of its net capital gain.
2.6
SOLE PROPRIETOR
 
Where an individual conducts business in his personal capacity, whether under a trading name or otherwise, a sole proprietorship exists. The proprietor is taxed as a natural person and enjoys no limited liability or shelter from risk. This avenue is clearly not available to corporate investors.