A limited liability company, which may be a private or public company, is established under the Companies Act. Private companies are the most common form of business entity in South Africa. Close corporations are widely used by small businesses. They are established under the Close Corporation Act. Co-operative socities, which are formed under the Co-operative Socities Act, are primarily used in the agricultural industry.

LIMITED LIABILITY COMPANIES

The articles of association of a private company must include the following provisions:

In general, companies that do not qualify as private companies are considered public companies.

All companies must appoint an independent auditor, and the scope of the auditor's examination may not be restricted.

UNLIMITED COMPANIES

The memorandum of association of a company may provide that all directors jointly and severally gurantee the debts of the company. Such companies, which are known as unlimited companies, are most commonly used to incorporate professional practices when the rules of the profession permit its members to practice through such companies. In general, all directors of such companies must be shareholders, and they must all be members of the profession. The name of an unlimited company must end with the word "Incorporated" or the abbreviation "Inc.". These companies are a type of private company and generally must comply with the provisions of the Companies Act applicable to private companies.

CLOSE CORPORATIONS

Close corporations are a common form of business entity for smaller businesses. In a close corporation, the members have the rights and obligations of both shareholders and directors, and consequently, ownership and management of the corporation are not separated. Close corporations may have up to 10 members, who must be natural persons. In general, few formal requirements are imposed on close corporations.

The capital of close corporations is called a "contribution". It is not subject to the stringent capital maintenance rules applicable to share capital in companies. The interest of a member of a close corporation is represented by a percentage, which is established on registration of the founding statement and may be changed by the registration of an amended founding statement.

Members of a close corporation enjoy limited liability, which may be lost if they violate provisions of the Close Corporation Act.

To form a close corporation, a two-page document must be filed with the Registrar of Close Corporations. Registration takes approximately one or two weeks and costs approximately R 900. No audit is required, but the annual financial statements must be reviewed by an accounting officer, who must be a member of one of the recognised professional accounting bodies. The name of a close corporation must be followed by "CC".

The Companies Act and the Close Corporations Act both allow the conversion of a company to a close corporation and the reverse. They also provide that the legal entity continues after the conversion. Consequently, the tax status of the entity and benefits and obligations under its contracts are not affected by the conversion. 

CO-OPERATIVE SOCITIES

Co-operative socities registered under the Co-operative Societies Act are used extensively in agriculture. They have limited liability and carry on business for the benefit of their members. The ownership rights and responsibilities of members are represented by share capital, which is similar to that of companies. A large portion of their business is conducted directly with their members. For example, they provide farming supply and centrally distribute farm produce.

The sale of member's products generates taxable income for the society. Bonuses (distributions within 12 months of the year-end) paid to members may be deducted to the extent of the co-operative's taxable income derived from transactions with members, before bonuses. To the extent that the bonuses are deductible to the society, they are taxable to the members receiving them. Dividends (distributions more than 12 months after year-end) are not deductible and are tax-free to its members. Co-operative societies are granted special allowances for storage buildings and storage equipment.

PARTNERSHIP AND SOLE TRADERS

Partnerships and sole proprietors are subject to few statutory requirements, but the partners and the proprietors generally do not have the protection of limited liability. However, in an en commandite partnership (in which not all the names of the partners are disclosed), the undisclosed partners may limit their liability to third parties to the amount of their contribution to the partnership. A partnership may not have more than 20 partners (who may be either natural of legal persons) unless it is a professional practice. Registration is not required. Written partnership agreements need not to be prepared, although they are advisable.

JOINT VENTURES

A joint venture is a contractual relationship between two or more enterprises engaged in a trade or business that does not qualify as a partnership.

TRADING TRUSTS

A trading trust is an unicorporated business organisation that is established by a deed under which property is held and managed by trustees for the benefit and profit of beneficiaries designated in the deed. It may provide certain tax advantages and still preserve the limited liability of the trustees and beneficiaries. Currently, trading trusts are not commonly used in South Africa, but they may be beneficial for certain types of businesses, including property development.

A trading trust is taxed at the rates applicable to individuals. Because distributions of profits by a trust to its beneficiaries are not considered dividends, such distributions are generally not subject to secondary tax on companies or dividend withholding tax.

BRANCHES OF FOREIGN COMPANIES

Under the Companies Act, a foreign company that intends to establish a place of business in South Africa must register as an "external company". To register, a copy of the company's memorandum and articles of association (or equivalent founding document) certified by a notary, together with certain specified forms, must be filed with the Registrar of Companies. Registration takes approximately a week and costs approximately R 1,500. The company must appoint a South African resident as the legal representative of the company.

An external company must appoint an auditor. The Companies Act provides that the financial statements of the branch and of the company must be prepared in accordance with the requirements of the country of incorporation. If an exemption from these requirements has not been granted, the financial statements of the branch and of the company must be filed with the Registrar of Companies, which makes them available to the public for inspection. Companies may apply for an exemption, and exemption requests are generally granted.

STRUCTURES USED BY FOREIGN INVESTORS

The form most commonly used by foreign investors is the private company. Annual formalities are minimal, except for the requirements to prepare annual financial statements and to have them audited. However, these financial statements are not required to be filed, and consequnetly, they are not available for inspection by the public.

The establishment of a branch of a foreign company should be considered if the company will engage in less than a full operation in South Africa, such as through a representative office. In other cases, the absence of withholding tax on the remittance of branch profits may make a branch an attractive alternative to a subsidiary.

FORMATION OF A COMPANY

REGISTRATION PROCEDURES

Before the company is formed, the proposed name is reserved. The name of a private company must end with the words "(Proprietary) Limited" or the abbreviation "(Pty) Ltd". A public company's name must end with the word "Limited" or "Ltd". Certain other specified conditions must be satisfied with respect to the selection of a name.

A company is formed by filing its memorandum of association and articles of association, together with certain specified forms, with the Registrar of Companies in Pretoria. The memorandum of association includes the company's name, its primary objective, its authorised capital and the names and signatures of the subscribers. Every company has full powers, unless the memorandum provides for restrictions and exclusions. 

The articles of association are the company's bylaws. The Companies Act includes a model set of articles, but in practice an attorney prepares the articles. A private company's articles of association must include certain specified restrictions.

TIME REQUIRED

Registration takes approximately one week, but additional time must be allowed for approval of the name, which could require an additional week.

INCORPORATION FEES

The cost of forming a company is approximately R 2,000.

NUMBER OF FOUNDERS

Private companies must have at least one and no more than 50 founders. For public companies, at least seven founders are required, and no maximum limit applies.

PERMISSIBLE TYPES OF SHARES

Private and public companies may issue common or preferred shares. These shares may be issued with or without par value. The shares of a public company may be bearer or registered, but a private company's shares must be registered. Private companies may issue separate classes of shares with different voting rights.

MINIMUM & MAXIMUM NUMBER OF SHAREHOLDERS

The maximum and minimum limits applicable to the number of funders also apply to the number of shareholders. No restrictions are imposed on the nationality or residence of shareholders.

INITIAL CAPITAL REQUIREMENTS

No minimum capital requirements are imposed. Companies are often formed with nominal captial (R 100 is common), with additional funding from loan capital.

South African law follows the traditional English law concept of capital maintenance, and consequently a company may reduce or repay its capital only if complied with rigorous conditions. Companies may not purchase their own shares or provide assistance for the acquisition of their shares.

SHAREHOLDERS'S MEETING

ANNUAL MEETINGS

Companies must hold an annual general meeting of shareholders not more than nine months after the end of their financial year. The annual general meeting may be waived with the written consent of all shareholders. Matters decided at the meeting include amendments to the companies' memorandum of association and articles of association, election of directors and approval of dividends. Most matters at the meeting are decided by majority vote. A 75% majority is required for major decisions, including changes to the companies' memorandum of association and articles of association.

REGISTERS

A company must maintain registers listing the names of the shareholders and the directors at the registered office of the company. These registers are available for inspection by the general public.

MERGERS AND RE-ORGANISATIONS

South Africa recently adopted a Takeover Code to regulate mergers and takeovers of South African companies. The code applies to all public companies and to private companies with more than 10 beneficial shareholders if the total interest and loans of the shareholders are in excess of R 5 million. (Beneficial shareholders are those holding shares for their own benefit, not as nominees).

The code applies to any "affected transaction", which is a transaction that has the effect of vesting control of a company in any person or persons acting in concert. "Control" is defined as a holding of shares that entitles the holder to exercise 30% or more of the voting rights. An affected transaction normally results in an obligation to make an offer to all other holders of shares in the target company at terms comparable to those of the affected transaction.

Before a company is listed on the Johannesburg Stock Exchange or its subsidiary , makes an acquisition or disposal that is material with respect to its capital or assets, it must obtain the consent of the shareholders of the company at a general meeting.

The Competition Board, which was established by The Maintenance and Promotion of Competition Act, may on its own initiative conduct investigations into any merger, acquisition or takeover and into the nature and extent of the controlling interest held or proposed to be held or acquired. It may take action against an acquisition that is contrary to the public interest. The parties to a proposed transaction, however, are not required to notify the board.

Except for the restrictions imposed by the exchange control authorities and the normal tax consequences of various types of acquisition methods, no significant differences exist between the methods used in South Africa and those commonly used in most western economies for the structuring and financing of acquisitions.

DIRECTORS

BOARD OF DIRECTORS

A private company is required to have at least one director; a public company must have at least two directors. The shareholders appoint the directors. The sole shareholders of a private company may serve as the company's only director. According to the Companies Act a director need not be a shareholder, but the articles of association may impose this requirement.

OFFICERS

The chairman , who is elected by the directors from among them-selves, manages the operations of the company. The directors also elect a managing director, who administers the day-do-day operations of the company. The Companies Act provides for the office of secretary, but this office is not required to be filled. In practice, private companies seldom have secretaries.

MANAGEMENT

The board of directors administers the affairs of the company on behalf of the shareholders. The shareholders have limited rights, which are exercised in general meetings.

ANY OTHER IMPORTANT REGULATIONS/REQUIREMENTS

REQUIREMENTS

After a company is established, it must register for certain tax and other purposes. These registration are described below:

INCOME TAX

The Registrar of Companies advises the Commissioner for Inland Revenue for the registrations of new companies. For income tax purposes, companies must appoint a South African resident to be responsible for its tax affairs and advise the tax authorities of this appointment. This resident is referred to as the "Public Officer".

VALUE-ADDED TAX

Companies with annual turnover of more than R 150,000 are required to register for value-added tax (VAT).

EMPLOYEES TAX

Companies with employees are required to register as employers and comply with the Pay-As-You-Earn (PAYE) provisions for employees that are set forth in the Income Tax Act.

Service Levies of Regional Services Councils and (RSCs), which provides utilise and certain other services to metropolitan and other areas, are funded by levies on turnover and on salaries and wages. All operating companies are required to register with the appropriate RSC.

Unemployment Insurance and Workmen's Compensation Fund Companies with employees are required to register with the funds for unemployment compensation and for workmen's compensation.

OTHERS

In specified circumstance, a company must comply with regulations related to health, safety and other matters.

ANNUAL REQUIREMENTS

All companies are required to prepare annual financial statements and have them audited. The shareholders generally approves the financial statements by written resolution at the annual general meeting.

ANNUAL REPORTS

Public companies must file their annual financial statements with the Registrar of Companies, which makes the statements available for public inspection. Private companies are not subject to this filing requirement.

INCOME TAX RETURNS

Companies must file annual income tax returns with the local Receiver of Revenue within 60 days after the end of their financial year. An extension of time to file of up to 12 months after the end of the financial year is usually granted. They also must file for an employee's tax reconciliation under the Pay-As-You-Earn (PAYE) system for the year ending on the last day of February.

Companies must pay provisional tax in two instalments during their tax year. The first instalment is due by the end of the sixth month of the tax year, and the second is due at the end of the tax year. The final payment, if any, is due within six months after the end of the tax year.