TYPES OF COMPANY

Page 40-49 PRESCRIBED BOOK

 COMPANIES AND OTHER BUSINESS ENTITIES: WHY
INCORPORATE A BUSINESS?
• There are a number of matters that require careful consideration before deciding which business
entity will be the most appropriate for a particular business.
• These include the number of persons who will be involved in the business, the extent of their
involvement, the capital required to commence business, the sources of that capital (that is, equity
and/or debt), the requirements of customers and clients, and the strategic objectives of those involved
• A number of choices are available when choosing a trading or business form.
• Any of the following can be used:
• a company, close corporation, business trust, partnership, or any combination. An example of a
combination choice is a company that carries on business using assets in its trading activities
that the company itself does not own but are held in a trust that leases the assets to the
company. The shareholders of the company could be the same people who are the beneficiaries of
the trust.
 1. SOLE PROPRIETORSHIP
• The simplest way to carry on business is for a person to carry on business in their own name
(sole proprietorship).
• It is easy to set up and manage, and there are few formalities other than obtaining any
necessary trading licences.
• However, individuals in high-risk businesses could be personally sued and their assets
exposed to risk from creditors.
 2. PARTNERSHIPS
• A partnership is also a relatively simple structure.
• Thus, unlike a company, a partnership is not a separate legal person.
• The assets of either partner may be subject to a claim by a creditor as all partners are jointly
and severally liable for business partnership debts.
• This means that one partner could become personally liable for all the debts of the entire
partnership.
• A partnership does not have the benefits of perpetual succession, and automatically dissolves
on the death or insolvency of a partner or on the retirement or admission of a partner.
• The law relating to partnerships is based on the law of contract and the common law.
• The partnership agreement will determine who controls the partnership business.
• A partnership has no perpetual succession. When there is a change in partners, or when a
partner dies, the partnership is dissolved.
 3. TRUSTS
• Trusts can also be used to carry on business activities.
• The complexity and laws relating to trusts are, however, often underestimated, and trusts are
more regulated than is generally understood.
• The law applicable to trusts is the Trust Property Control Act, but trust law has been largely
developed through decided case law.
• The trustees control a trust.
• A trust can provide for perpetual succession (that is, a trust does not have to have a finite
lifespan).
• Beneficiaries can therefore die or change yet the trust can continue. Trust deeds often
provide that a trust will come to an end on a specific date, but at the same time, the trustees
are often given powers to bring the trust to an earlier end if they choose to do so, and are
often given powers to extend the life of a trust beyond the specified date.
 4. CLOSE CORPORATION
• A close corporation has the benefits of perpetual succession.
• Therefore, members can change, but the rights and obligations of the corporation remain
those of the corporation itself.
• A close corporation has its own legal existence, and contracts can be entered into in the
name of a close corporation and remain valid, despite changes in a corporation’s
membership.
• The relevant statute is the Close Corporations Act, and the common law also applies to close
corporations.
• Control of the business lies with the Members to control the close corporation.
 5. COMPANY
• Companies are very useful business entities, and also offer the advantages of perpetual
succession as in the case of close corporations as described above.
• In addition, companies allow active and/or passive investors to contribute capital in return
for shares, and holding shares allow investors to realise their investment in a fairly easy
manner as it is often easier to sell shares than an interest in a sole proprietorship or
partnership.
• Companies also offer protection for shareholders when the business fails or is being sued.
• Applicable law to companies is the Companies Act, 2008, in addition to the latter statute, the
common law (especially decided case law) also applies to companies. For example, many of
the concepts and principles relating to the duties of directors are found in legal judgments of
the courts.
• A company can be any of the following:a public company,a private company,a personal
liability company,a non-profit company, state-owned company, and external company.
• Control of the business lies with the directors manage and control a company.
 5. COMPANY….CONTINUED
• The Companies Act, 2008 provides for two types of company – namely profit companies,
and non-profit companies.
• Profit company : A company is a profit company if it is incorporated for the purpose of
financial gain for its shareholders. A profit company may be incorporated by one or more
persons. The Act does not restrict the maximum number of shareholders in a profit company,
not even in the case of a private company.
• There are four types of -profit company:1. a public company2. a state-owned
company3. a personal liability company4. a private company.
 THE NON-PROFIT COMPANY
• A non-profit company is a company that was previously recognised in terms of s 21 of the Companies Act, 1973. The
Companies Act, 2008 provides for the regulation of non-profit companies in Schedule 1.
• NPC must have as at least one of their objectives a public benefit object or an object relating to one or more cultural or social
activities or communal or group interests.
• All assets and income of a non-profit company must be used to further the company’s stated objective.
• A non-profit company may acquire and hold securities issued by a profit company, or directly or indirectly, alone or with any
other person, carry on any business, trade or undertaking consistent with or ancillary to its stated objects.
• An incorporator, member or director, or person appointing a director, of a non-profit company may not directly or indirectly
receive any financial benefit or gain from the company, other than reasonable remuneration for work done, or compensation
for expenses incurred, to advance the stated objects of the company.
• When a non-profit company is being wound up or dissolved, no member or director of that company is entitled to any part of
the net value of the company after its obligations and liabilities have been paid. The entire net value of the company must be
distributed to one or more non-profit companies, external non-profit companies carrying on activities within the Republic,
voluntary associations, or non-profit trusts having objects similar to the company’s main object.
• A non-profit company is not required to have members, but the provisions of its MOI may provide for the company to have
members. Two categories of member are provided for – namely, voting and non-voting members. Voting members of a non-
profit company will each have at least one vote. The word ‘members’ is used for non-profit companies, whereas the word
‘shareholders’ is used for profit companies.The incorporators of a non-profit company are its first directors and its first
members – if its MOI provides for it to have members.
 THE PUBLIC COMPANY
• A public company is any profit company that is not a state-owned enterprise, a private company or a personal
liability company. The suffix for a public company is Ltd.
• In a public company, shares may be offered to the public and are freely transferable.
• A public company could be listed (on a stock exchange) or unlisted.
• The recognition of public company status is essentially sourced in the MOI of a company, which is the sole
governing document of a company.
• Its provisions will determine whether a company enjoys public company status.
• A public company is considered to be a juristic entity, that exists separately from its owners and
shareholders, and has perpetual succession.
• Thus, where such a company liquidate, the shareholder’s loss is limited to the amounts that they
originally vested, and they will not be held personally liable for debts incurred by the company.
• In a public company there must be at least three directors and seven shareholders;
• Only public companies may be listed on the JSE;
• Public company must be audited and must produce audited financial statements;
• Where a public company intends to vary its constitution, such variation can only be done by particular as
well as a written, special resolution that is signed by all relevant stakeholders;
 THE STATE-OWNED COMPANY

• A state-owned company (SOC) is a profit company that is either listed as a public entity in
Schedule 2 or 3 of the Public Finance Management Act, or is owned by a municipality.
• A SOC is therefore a national government business enterprise. It is a juristic person under the
ownership and control of the national executive that has been assigned financial and
operational authority to carry on a business activity.
• The principal business of a government business enterprise or SOC is that it provides goods or
services in accordance with ordinary business principles and is fully or substantially financed
from sources other than the National Revenue Fund or by way of tax, levy or any other
statutory money.
• Examples of SOCs are, amongst others, the following: South Africa Airways, Eskom, Telkom,
SABC, Post Office, PRASA, PetroSA, Council for Scientific and Industrial Research, Public
Investment Corporation Limited, Rand Water, and SA Bureau of Standards.
 THE PERSONAL LABILITY COMPANY
• A Personal Liability Company Inc. is a private (profit) company that is mainly used by
professional 'associations' such as Lawyers, Engineers and Accountants, who wish to exploit
some of the advantages of corporate personality such as perpetual succession.
• The Company's Name must end with the word “Incorporated”.
• It operates on the principle of 'personal liability. A personal liability company’s MOI will
state that it is a personal liability company, which usually means that the directors are jointly
and severally liable together with the company for all contractual debts and liabilities
incurred during their terms of office.
• The directors and past directors (where applicable) of personal liability companies are
jointly and severally liable together with the company for any debts and liabilities arising
during their periods of office. Sec 19(3)
• The effect of section 19(3) on a personal liability company is that it renders the current
directors and past directors as co-directors with the company. The directors and the company
are therefore singuli et in solidum for the contractual debts and liabilities of the company
 THE PERSONAL LABILITY COMPANY
• The liability of a director or a past director is limited to the debts and liabilities of the
company which were contracted during his period of office as a director. It is further limited
to the contractual debts and liabilities of the company, as opposed to debts and liabilities of
some other nature.
• A personal liability company is prohibited by MOI from offering its shares to the public and
the
• transferability of its shares is restricted.
• Personal Liability Company must prepare annual financial statements, but is not required to
lodge its annual financial statements with the Commission.
• Incorporated by 1 or more persons for financial gain for the shareholders (owners).
• Must have a minimum of 1 directors.
• As a professional, you can  register a company that you want to be personally liable for
• NB: CASES TO BE STUDIES Sonneberg McLoughlin v Spiro 2004 (1) SA 90 C
• MedX (Randburg)(Pty) Ltd Branfield (676/2012)2013 ZASCA 113 [page 46 textBook
 PRIVATE COMPANY (PTY) LTD
• A private company is a profit company whose MOI prohibits the offering of its shares to the
public and restricts the transferability of its shares.
• There is no restriction on the number of shareholders of a private company in terms of the
Companies Act, 2008.
• Smuts v Booyens, Markplaas (Edms) Bpk v Booyens the court stressed that the restricted
transferability of a company’s shares is an essential attribute of a private company and a
shareholder’s right to transfer shares at all must be restricted by the company’s MOI.
• Therefore, in order for a profit company to qualify as a private company, its MOI must
restrict the transferability of its securities (‘shares’ are included in the definition of
‘securities’ in the Act).
 EXTERNAL COMPANIES
• external company is a foreign company incorporated outside of South Africa, irrespective of
whether it is a profit or non-profit company or carrying on business in South Africa.
• Section 23 (2) explains the meaning of conducting business or non-profit activities.
• In terms of this section, a foreign company is deemed to conduct business or non-profit
activities within South Africa if it: is a party to one or more employment contracts within the
Republic; or is engaging in a course of conduct, or has engaged in a course or pattern of
activities within the Republic over a period of at least six months, such as would lead a person
to reasonably conclude that the company intended to engage continually in business or non-
profit activities within the Republic.
 DOMESTICATED COMAPNIES
• A ‘Domesticated company’ means is a foreign company whose registration has been
transferred to the Republic in terms of s 13(5) to (9) of the Companies Act, 2008.
• Section 13 provides that a foreign company may apply to transfer its registration to the
Republic from the foreign jurisdiction in which it is registered.
• Such a company will then exist as a company in terms of the South African Companies Act
as if it had been originally incorporated and registered in terms of that Act.
• The requirements for such transfer are listed in Page 52of prescribed book
• s 13(7) lists circumstances under which a foreign company may not transfer its registration
to the Republic.
 RING –FENCED COMAPNIES
• Section 11(3) (b) of companies Act provides that a company’s name must immediately be
followed by the expression “RF”meaning ring fenced if a company’s MOI contains:
• A. any restrictive conditions applicable to the company and any procedural requirement that
impedes the amendment of any provision of the MOI, or
• B. if a company’s MOI contains any provision restricting or prohibiting the amendemnt of
any particular provision of the MOI
• If a company’s name ends with letters RF outsiders dealing with that company are made
aware that there are special provisions in that company’s MOI.
 RING –FENCED COMAPNIES
• RF-company. Section 19(5) of the Companies Act determines that a person is deemed to
have knowledge of any provision of a company’s Memorandum of Incorporation in terms of
section 15(2)(b) (relating to special conditions applicable to the company and additional
requirements regarding their amendment).
• This is subject to the condition that the name of the company includes the ending “RF” and
that the company’s Notice of Incorporation contains a prominent statement drawing attention
to such a provision as required by section 13(3).