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STARTING THE ENTERPRISE

INTRODUCTION:
Definition of business:
– “anything which occupies the time, attention and labour of man for the
purposes of profit”

There are a number of reasons for people to enter into business in a particular format.
Those reasons will differ from person to person and from business to business. We will
be investigating the major forms of business enterprises in this module.

Generally, the decision of which entity to choose will be determined by whether the
business needs to raise capital, whether the participants/investors favour protection over
flexibility or, very often, the level of commercial sophistication of said participants.

Important Concepts

Refer to the voice recording “important concepts”

1. Juristic person/Natural person

This concept was introduced in Commercial Law. In our law only legal subjects
can hold rights and obligations. Natural persons (referred to as “individuals” in
the Companies Act) are human beings and have inherent legal subjectivity.
Legal persons are entities that are created by legislation which legislation
provides for their legal subjectivity. Legal persons exist as separate legal
subjects apart from the participants in the entity.

2. A separate legal personality

This is a concept was also introduced in Commercial Law, but perhaps not in so
much detail. It is a concept that is central to understanding how business entities
like close corporations (CC’s) and Companies work. Essentially, the law
provides for the creation of legal entities that are granted the status of legal
subjects, in other words they are granted separate legal personality. These
entities owe their existence to the legislation that provided for their creation. We
call such legislation enabling legislation since it enable people to create these
entities. The enabling legislation that will be dealt with in this module are the
Close Corporations Act and the Companies act.

Since the entities are created as legal subjects, they can have rights and
obligations just like natural persons. The crux is that the cc or company is a legal
subject separate from the investors and/or managers in that entity. As will be
seen later this means that the investors and/or managers do not hold those rights
or liabilities in their names. The rights and liabilities are those of the entity. This
concept, whilst it sounds simple, is the single most important to internalise. It
must be clear that when members meet to make decisions on behalf of the cc, or
when directors meet to make decisions on behalf of the company, it is not the
members or directors that make those decisions, but the cc or the company itself.
As a result, the cc or the company, not the members or the directors, bear the
consequences of those decisions.

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3. Perpetual succession

Perpetual succession is a necessary implication of legal personhood. All

people/natural persons die at which stage they lose their legal subjectivity.
Corpses are not legal subjects, but legal objects.

Legal persons do not die. It is conceivable that companies may exist forever, in
perpetuity. If that is the case, it must replace its managers from time to time. So
one manager will take over from another. We say that the latter manager has
succeeded the former. In this way, we have perpetual succession as a direct
result of the legal person having separate legal personality.

4. Shareholders
Shareholders are essentially the investors in a company. They buy shares in a
company, in return for which they acquire certain rights. Chief among these
rights are ownership, voting rights and the right to share in the distributable
profits of a company.

Ownership entail having full rights to dispose of the share. That share may be
disposed of in any legal manner. It may be sold, donated or even bequeathed in
a will.

Generally, shareholders get the right to vote at meeting of shareholders held by

the company from time to time. It must be clearly stated that shareholders are not
involved in the day-to-day running of the company, that is left to the directors.
Typically, the only time that a shareholders will be able to exercise the right to
vote will be at the Annual General meeting (AGM). At all other times the
directors will make decisions for the company. [Note: the directors make
decisions for the company, not for themselves. These are the company’s
decisions as a separate legal person, the directors merely represent the
company in such matters.]

In certain circumstances a company may be authorised to distribute some or all

of its profit to the shareholders. We refer to such distributions as dividends. It is
crucial to note that such a right is conditional. Until a dividend has been
authorised by the directors the shareholder has no enforceable right to a
dividend.

Various Business Vehicles:

– Sole proprietorship
– Partnership
– Close corporation
– Company
– Business trust
Sole proprietorship
 Very convenient – requires no formalities
 Entrepreneur simply commences business under own name / trading name
 Sole proprietorship – not a separate legal entity
– Rights & duties arising out of business attach directly to proprietor

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– Assets of business are owned by proprietor & all debts of business

belong to him personally
– Proprietor pays tax at individual rate
 Disadvantage – if business can’t pay its debts, proprietor risks personal ruin

A sole Proprietorship is the simplest of business entities. It literally refers to an individual

running his own business out of his own pocket. There are no formalities in its creation.
There is no need to register the business with any governmental body unless the type of
business requires it. For example, is a sole proprietor were to start a business as an
accountant they would have to register with SAICA.

The business does not have separate legal personality so it cannot have rights and
obligations in its own name. Therefore, all the profits and all the losses attributed to the
running of the business are those of the sole proprietor. This can be very risky in that a
creditor can proceed against the sole proprietor directly and may even attach his/her
personal assets to pay for a business debt.

It is prudent for a sole proprietor to keep track of personal assets and liability and
business assets and liabilities in order to monitor the progress of the business. This is
not required by law since there is no legal difference between personal and business
assets and liability because the business is not in an entity that has separate legal
personality.

It should be clear that this approach offers no protection for the sole proprietor’s
personal assets from business creditors. On the other hand, at least the sole proprietor
is in control of all decisions. As such, if there are business creditors that proceed
against him personally, at least it was as a result of his own decisions, unlike in a
partnership.

Partnership

There is a link to a video on Moodle. Follow the link to the video or log in to Unitube. If you
follow the link you will be given an option to download the video. I suggest that you do so
since you will only be able to stream it from Unitube.

 “… a contract between persons, in which persons concerned agree to contribute

money, labour or skill in a common stock, & to carry on business with object of
making profit for their joint benefit”
 Is not a separate entity:
– Simply a number of people conducting business together in their personal
capacities
– Partners are personally liable for debts of partnership, but only to extent
that debts cannot be met out of partnership assets
– Partner is jointly & severally liable for partnership debts

As can be seen above, a partnership is a contract between at least 2 people working

together to make a profit from a particular business with the ultimate goal of sharing that
profit in some way or another.

A partnership starts with people making a contribution to a joint fund that will be used to
start and run the business. These people enter into a contract with each other in terms of
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which they will run that business to make a profit. Since a partnership is not a separate
legal person it cannot have its own rights and obligations. This results in the partners
being responsible for the business liabilities of the partnership. This is somewhat tricky
conceptually. For practical reasons the law allows creditors to proceed against the
partnership in its own name and only if the partnership cannot pay will they claim the
money from the partners in their personal capacity. This is something of a conundrum
because the partnership does not exist as a separate person from its partners. As
stated, this is simply a matter of practicality.

The lack of protection for the partner’s personal assets create massive risk for the
partners. They run the risk of being personally responsible for the debts of the
partnership business. The fact that a specific partner had no part in the decision-making
process is irrelevant to their potential liability.

Sole proprietors & partners themselves normally constitute management.

Company & close corporation

 Separate legal entities distinct from their members:
– Juristic persons – own legal personality
– Law recognises the corporation itself & not its members
– Corporation itself has capacity to bear rts & duties distinct from its
members
– Members of CC or co not personally liable for debts of business – “limited
liability”
– Enjoy perpetual succession

As can be seen above, CC’s and companies are legal persons in their own right. They
are able to hold their own assets and are liable for their own debts. This is fundamental
to understanding how CC’s and companies work. The separate legal personality
insulates the participants in those entities from the debts of the business.

Close corporation
– 1 to 10 members who are usually involved in the management of the business

Simplistically stated, we can view the Close Corporations as a form of partnership with
separate legal personality, I isn’t, but it is a useful mental conceptualisation of CC’s.

A CC also starts with members making a contribution. Here though, that contribution
belongs to the CC since the CC has separate legal personality and can own things in its
own right. The members of a CC also get to enter into contracts on behalf of the entity
as do partners in a partnership. The major difference is that creditors proceed against
the CC and not the members. The members do not have liability for the CC’s debts.
This is as a direct result of the CC having separate legal personality.

There is a link to a video on Moodle. Follow the link to the video or log in to Unitube. If you
follow the link you will be given an option to download the video. I suggest that you do so
since you will only be able to stream it from Unitube.

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Company
– Shareholders contribute capital for business
– shareholders not usually participate in management of business
– Business managed by directors of company, each usually having different
functions.

Companies also have legal personality separate from its shareholders. This also
protects shareholders from the debts of the company.

Shareholders are essentially investors in the company. They then elect or appoint
directors who act as the managers of the company.
There is a link to a video on Moodle. Follow the link to the video or log in to Unitube. If you
follow the link you will be given an option to download the video. I suggest that you do so
since you will only be able to stream it from Unitube.

Business trust
 “Founder transfers assets to trustees who administer assets for benefit of the
beneficiaries named by trust”
 Often used to avoid income tax & estate duty
 Trustees & beneficiaries generally not liable for debts of trust

Trusts are, technically, not legal persons, but the law treats them as if they are.

Registration & Formalities

To start the business:
Company
– Register as corporate entity with CIPC in Pretoria
Close corporation
– Register as corporate entity with CIPC in Pretoria
Business trust
– Register with Master of High Court in Grahamstown
Partnership
– Not registered – created by agreement between partners
Sole proprietorship
– No formalities when operating as sole trader

OTHER Registration & Formalities

South African Revenue Service
– Income tax iro income of business
– Income tax of employees (SITE or PAYE)
– VAT if turnover exceeds certain amount
Department of Labour
– Unemployment insurance
– Workmen’s compensation
– Skills levy

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Local Regional Services Council for payment of applicable levies

SPECIAL INSTANCES Registration & Formalities

 Trading license from local authority - Business Act 71 of 1991
 Sale or supply of meals or perishable foods
 Provision of certain types of health facilities or entertainment
 Hawking in meals or perishable foodstuffs

PUBLICIZING THE BUSINESS

– Display full name outside every building where business is carried on

– State full name in all notices, cheques, letterheads, invoices etc