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Business enterprise law study notes for 2022/2023
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lOMoARcPSD|10435457Business Enterprise law notes for 2022
Business enterprise law (University of Johannesburg)
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BUSINESS ENTITIES
“Corporate Law” by Cilliers, Bernade, et al, 3rd ed (2000)
“Entrepreneurial Law” by Cilliers, Bernade, et al, 3rd ed (2003)
Chapters 1-6 (Partnership Law)
“South African Company Law Through the Cases” by Hahlo, 6th ed (1999)
“Basic Company Law” by Beuthin, 3rd ed (1999)
Henochsberg on the Companies Act
Blackman, “Commentary on the Companies Act”
Gower, “Principles of Modern Company Law”, 6th ed (1997)
FORMS OF BUSINESS ENTITIES
Business entities deals with the various types of legal entities that are available:
i. sole proprietor/ trader
ii. partnership
iii. company
iv. close corporation
v. business trust
vi. stokvel (collective savings scheme)
What factors should be considered when deciding which entity to enter:
1. personal liability
2. growth and expansion (can this be accommodated)
3. formalities
4. taxation or tax liability
5. management and control structure
i. SOLE TRADER
An obvious advantage of a sole trader is that he alone is in control of the business. This means
that he can call all the shots, receive all the profits and is not duty-bound to share. In addition,
there are no major formalities.
However, a disadvantage of a sole trader is that he endures full personal liability (should he
incur loss, he alone bears the loss), even to the extent that his personal savings can be attached to
pay debts. There is no limited liability, thus there is maximum loss. There are also limited
opportunities for growth and expansion. In terms of tax liability, the sole trader is taxed as an
individual on a sliding scale. As a result, the higher your profits, the higher your tax (to a
maximum of 40%). Finally, there is no perpetual succession; liabilities cannot be passed on
without the consent of the other person.
ii. PARTNERSHIP
There are legal restrictions on the size of a partnership. There is to be a minimum of 2 members
and a maximum of 20 members. In terms of formalities, there are no heavy regulations. One can
have an oral partnership agreement, but it is usually written. This can merely be done between
partners and does not have to be registered. In terms of taxation, partners are taxed individually
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and is therefore similar to a sole trader (higher rate of tax than companies). It is important to note
that the wealthiest partner is always at risk to be targeted by creditors.
The disadvantages are as follows. Firstly, there is personal liability and partners do not enjoy limited liability. This
means that every partner is ultimately personally responsible for the debts of the partnership. But partners
only become liable for debts if the partnership cannot pay. Thus in a partnership, the partners are jointly (all
give proportionately) and severally (one person liable for all) liable.
Secondly, there is a lack of perpetual succession. This is of crucial importance when it comes to business. If a
partner dies, then you must reformulate the partnership agreement as the old partnership dissolves. The
following leads to the dissolution of a partnership: if a partner dies or retires, or if the partnership goes
insolvent. Basically if there are any changes, the legally the partnership must dissolve. This shows that the
lack of perpetual succession is a huge disadvantage.
Thirdly one must look at the management or control structure. Can the partnership be liable for the decision of one
partner? Importantly, one does not need the consent of the other partners!! Every partner automatically by
operation of law has implied authority to enter into contracts that fall within the scope of the partnership
business. Then all partners are bound, even if lacking knowledge. Therefore, one should only go into a
partnership with persons you know and trust!
Lastly, the partnership does not have separate legal personality and is considered a mere association of persons.
iii. COMPANY
One can form a company with 1 to 50 members. Having only one person is a major advantage.
There is no implied authority and a separate legal personality is formed. The advantages are as
follows. Firstly, in terms of tax liability, there is a huge bonus as companies pay a maximum of
30% tax. Secondly, ownership and control can be split or divorced in a company (management
and control structure). This means that one can be a shareholder or owner without being
burdened by the affairs of a company, which is rather controlled by a board of directors. This
situation is unique.
Thirdly, a company is registered and is brought into existence as a separate legal person. It is
entirely separate from its members. Therefore, anything bought by the company belongs to the
company (limited liability; S v De Jager) Personal savings are completely safe from creditors.
Thus, you can use a company as a vehicle for going into business without the risk of losing one’s
own personal savings (one cannot be sued - except for fraudulent reasons).
Fourthly, an issue which is crucial to the success and growth of the business = perpetual
succession. A company continues forever, regardless of death of retirement.
The disadvantages are as follows. Firstly, there are major registration formalities. If you form a
company, you have to draft a Constitution in the form of two documents: a memo of association
and articles of association. Having signed the Constitution, one must then lodge it at the
Registrar of Companies Office (and register the company). When it is registered, then it is open
to public inspection (can now register it electronically).
Secondly, companies are heavily regulated by the Companies Act 1973 (containing 445
sections). In fact, financial statements must be audited by an auditor. Why? Shareholders own
money, but do not control the company and there is thus a need to regulate the directors.
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Thirdly, ownership and control is split and there is limited liability. Thus the legislation steps in
to protect the creditor and the shareholder. Lastly, the Companies Act is tailored for large
companies and not necessarily for smaller companies, especially those with only one member.
Because the formalities for companies are so burdensome, the legislation has introduced the
close corporation which is regulated by the Close Corporations Act (1984)
iv. CLOSE CORPORATIONS
The essence of the close corporation is that it borrows from both company and partnership law
(internal affairs). The close corporation is designed specifically for the small unsophisticated
business person. The object is to introduce a less formal and less expensive type of entity.
However, there are registration requirements. The Constitution of the close corporation must be
lodged with the Registrar of Close Corporations and is open to public inspection.
It is a separate legal person and thus has advantages just like a company (limited liability and
perpetual succession). There is no board of directors, to avoid the split between ownership and
control. The close corporation must have financial statements, but do not need to be audited.
If one wants to join a company one must buy shares and become a shareholder, but a close
corporation does not have shares. How does one become a member of a close corporation? One
must make an initial contribution through money, goods or services (like a partnership).
The close corporation is limited in size to between 1 and 10 members. This is designed for small
businessmen, and is not limiting the size of the business. (Note: a member cannot be a legal
entity)
v. BUSINESS TRUST
A trust is a relationship in terms of which one person, the founder, hands over assets to another,
the trustee, to administer it for the benefit of the third party, the beneficiary. There are two types
of trusts:
a trust created in terms of testamentary documentation (testamentary trust). This comes
into existence upon the death of the founder.
an inter vivos trust (“living” trust) - the founder can set up the trust in his lifetime.
Would you advise someone to form a business trust?
In English law, a trust is a separate legal person. In South African law, a trust does not enjoy a
separate legal personality but one can get the benefit of this and limited liability due to
the trustee’s administration of the trust.
A trustee’s estate is divided into two parts: the private estate and the trust estate. In terms of the
law of trustees, every trustee must separate the two estates. Thus the creditor of the
trustee’s private estate cannot claim from the trust estate. Because of this separation, one
is also getting the benefit of limited liability and even perpetual succession.
Of all trading entities, the business trust is probably the least regulated (fewer formalities). In
addition, trusts were once used as a device of evading tax. However the tax advantage has
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