Covers the various sections relating to the theory of Companies, as per the IEB Accounting SAG.
Includes notes from the textbook, as well as additional class, video and research information.
Applicable to all IEB Grade 12s.
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Companies
A company
= a form of business enterprise which is created by an association of persons with a common
profit motive, as a separate legal entity with its own legal personality under an enabling act of
parliament, namely the Companies Act No. 71 of 2008.
Legal personality
A company is a legal personality of its own = in eyes of law it is regarded as a person.
It can enter contracts in its own name, can sue and be sued in its own name etc.
This does not apply to sole traders and partnerships.
Implications of being an independent legal personality:
1. Memorandum of Incorporation (MOI)
The document that is required to form a company.
It sets out the basic rules of how it is to be run.
The MOI determines the type of company to be formed and the rights and duties off all the
company’s stakeholders. (Stake holders = accountants, directors and shareholders)
It also covers matters such as the name of the company, its objectives, the amount of
authorised share capital etc.
2. Shares and shareholders
The owners of a company = shareholders (They provide capital).
There are multiple owners or shareholders, so the capital is divided into ‘shares’.
Each shareholder provides capital by buying a certain number of shares in the company.
The price per share paid by the shareholder = issue price
This price may change over the life of the company, depending on performance.
3. Directors
- They are required to run the company to the best of their ability.
- They are appointed by the shareholders at the AGM.
- They receive directors’ fees for their services.
4. Continuity
A company has the capacity to have its own rights, duties and an indefinite existence apart from
its shareholders.
A company’s life continues even after the withdrawal or death of one of its owners.
5. The assets of a company
A company acquires assets under its own name.
They are exclusive property of the company and do not belong to the shareholders, unless a
deliberate decision is made to distribute dividends or to buy back shares.
The buying back of shares is to avoid profit dilution.
Upon liquidation of the company, the shareholders share in the dividends of the asset.
6. Liability for debts of a company
A company is liable for its own debts and its shareholders can not in any ways be held liable for
them.
The shareholders of a company are seen as separate legal personalities.
, 7. Ability to enter into contracts
A company has an independent contractual liability, meaning that it can do business with other
legal personalities.
Only the directors or staff members with delegated authority, can act on behalf of the company.
There is complete separation of control from ownership within a company.
8. Independent auditors
Due to the separation of control from ownership, the owners need to be assured that the
financial statements prepared by the directors, contain reliable figures.
An independent auditor conducts tests and checks on the books, so that they can express an
opinion on their reliability.
They are paid an audit fee per hour for their service.
Qualified report = auditor is unhappy
Unqualified report = auditor is happy
9. Sharing of profits
The profits or losses that a company makes, are for the companies account.
They do not belong to the shareholders.
Only when a company formally distributes dividends to its shareholders or when a company
buys back shares, do the shareholders become entitled to a share of the profits.
10. Income tax
A company is a tax entity in its own.
Companies earning a profit will need to pay income tax to the SA Revenue Service halfway
through the financial year and again at the end of the financial year in the form of provisional tax
payment.
Once the financial statements are finalized, a final payment is made to SARS or a refund is
received from SARS.
11. Registration of a company
All companies must be registered with the Companies and Intellectual Properties Commission.
12. Company name
No two companies can have the same name.
The last word in a company made must be “LIMITED”, which is appreciated to “LTD”
Limited liability
Since a company has a separate legal personality distinct from its owners, the shareholders
cannot be held liable for debts.
In the event of insolvency, the shareholders cannot be asked to settle the amounts owed by the
company.
They will each have to contribute a certain amount of capital, but this is the only amount that will
be lost by them.
The liability of the shareholders is limited to the amount paid by them to the shares of the
company.
Importance of limited lability
- This concept has a great significance for the economy of a country.
- Certain types of industry cannot feasibly operate as partnerships in view of large amounts of
capital required.
- Large companies are also vital for providing employment.
- The protection offered by limited liability is also vitally important in stimulating investment in a
country.
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