There are several different options for company structuring
The first question to ask yourself when you’re considering starting a business is “Should I register a company?”
If your business is a small one-person show, the need to register a company is not done away with. As the sole proprietor of a company no distinction is made between your assets and those of your company. They are one and the same thing. This means that, in the unfortunate event of your business being sued, your personal assets can become embroiled in the process.
The way to mitigate this risk is by separating yourself from your business. This is achieved by registering what is referred to as a “juristic person” to run your business through. These juristic persons include private companies and closed corporations. This then means that if the juristic person gets sued, your personal assets are safe. Of course, there are some exceptions to this rule but these are only in very specific circumstances.
The next question you need to ask yourself is “What kind of company should I register?” So what are your options?
Private Company – (Pty) Ltd
These are by far the most widely-used business entities. A private company would in most cases be the appropriate vehicle to house your business. It allows you to create shares to be held by the shareholders. Shareholders may be just you by yourself or split with others. The rights to transfer these shares are restricted in that they may not be offered to the public for subscription.
The shareholders can then regulate the relationships between themselves and the company, on the one hand, and between themselves and the other shareholders on the other hand by concluding a Shareholders Agreement. Subject to the provisions of the Shareholders Agreement, the Shareholders can vote on how the company business is run, nominate directors to promote their interests in running the company, and can regulate how shares in the company are sold.
Importantly, private companies can hold assets in their own name, including shares in other companies.
Public Company – Ltd
A public company is an entity that houses a business whose shares are issued through an initial public offering (or “IPO”). These are then traded publicly on at least one registered stock exchange. An example of a registered stock exchange would be the Johannesburg Stock Exchange.
A public company is not really the first port of call for a new business. Therefore, we’ll just briefly mention two facts. Firstly, there is no restriction on who can purchase the shares of a public company as they are traded publicly. Secondly, the value of the company is derived the trading of the company’s shares.
Close Corporation – CC
In the past, private companies were subject to many regulatory requirements that made them unattractive as options for small businesses. Many people therefore opted to register close corporations because they were more cost-effective and less regulated than private companies.
Since the introduction of the new Companies Act in 2008, no new CC’s can be registered. Luckily, many of the requirements for private companies have also been removed. Therefore, a private company is now a more viable and simple business entity that has most of the benefits of a CC.
Personal Liability Company – Inc
This form of business entity, while fairly similar to a private company, is chiefly used by associations of professional persons. These include lawyers, architects, engineers and accountants.
The main differentiating factors between a personal liability company and a private company are:
- The directors of a personal liability company can be held liable in their personal capacities for the debts of the company, as well as the companies actions; and
- An increased amount of regulatory requirements, which can be administratively burdensome.
You need a written agreement between the members, stakeholders, or shareholders (as the case may be)
Whatever company structure you choose, an important next step is to establish a written agreement with your shareholders, stakeholders or members that will regulate not only the relationship between all of you, but also the relationship between yourselves and the company.
An agreement of this nature records and regulates how equity in your company is bought and sold, how decisions are made in the company, the protections afforded to minority shareholders or members, the things that a party to the agreement could do that would result in a forced sale, and many other aspects of the relationship.
You need to check whether your industry is subject to regulation and, if it is, you need to make sure that you comply with the applicable regulations
An incredibly relevant consideration to your business is whether your industry is regulated, and if it is, whether you comply with those regulations. Regulations can range from disclosures that you are required to make to your clients, to provisions that are required in your client agreements, to professional or industry bodies that you have to become a member of.
At the best of times, South Africa’s regulatory environment can be tricky, and at the worst of times it is a minefield. The consequences of failure to adhere to any applicable regulations could be dire, in some cases even extending to a fine or imprisonment for a certain period.
It is therefore extremely important to ensure that your business is fully compliant.
You need to regulate your relationship with your service providers and suppliers
Just like you need to control the relationship with your stakeholders, you need to ensure that you make your expectations clea to your service providers, establish what their expectations are of you, agree on how and when payment must be made, and any other relevant consideration.
The best way to do this is to enter into a written service level or independent contractor agreement. This will act as a record of your agreement. The agreement can then be referred to in the event of a dispute. Lots of service providers set up their own terms for their clients and may be unwilling to vary from their established way of working, which leads us to…
You need to have appropriate terms and conditions for your clients and customers
Customers love certainty. They love knowing how things are going to happen, when things are going to happen, and what is expected of them. You may have heard “T’s and C’s apply” in the media, and this is what those adverts are referring to.
Terms and conditions set out your business’ process from the quoting stage to the final payment stage. They prove to be of massive help when a dispute arises simply because everything is written down. Your client has agreed (in writing!) to do things a certain way. This would give you a greater scope in controlling the orders that your client gives you and when you get paid.