What is a company?

Definition, Formation / Registration, Sale & Termination (South Africa)

How companies work

What is a Company....? How is a Company formed? What is a Shareholder and what is a Memorandum of Incorporation?

Are you thinking about starting a new business and possibly registering a Company? Or perhaps going into business with someone and looking to start a Company? In this case, are you wondering what a Company actually is, how a Company is incorporated and what it means to have a Company? In this Article I have set out these answers.

In this Article, I have set out in summary form:

The Definition of a Company
What are the top features of a Company
How is a Company formed
What is the registration process
What is a Shareholder and a Director (and the difference between the two)
What documents and agreements does a Company have�
How do you sell your business if you want out
How do you terminate a Company

Definition of a Company

In simple terms a Company can be defined as an entity, which is regulated by the Companies Act, 2008 (“the Companies Act”), which is registered at the South African Companies and Intellectual Property Office (“CIPC”), has its own separate legal identity and is incorporated by its Shareholders.

As a Company is a separate legal entity with its own registration /ID number, a Company can sue, be sued, enter into contracts with 3rd parties and is liable for its own debts.

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Top Features of a company

1. General Features

A Company, unlike a partnership or sole proprietorship, is an actual legal entity. There are several features of a Company which include (but not limited to):

A Company must have at least 1 Shareholder and 1 Director
A Company is a separate legal juristic entity, separate and distinct from its Shareholders and Directors
The "business" of the Company is therefore owned by the Company and the Company is entitled to receive the profit from the business
The Company is liable for its own debts. NOT the Shareholders or Directors (unless they have for example signed as surety)
The Company can own its own assets (including all fixed assets, stock in trade, intellectual property (its name, logo, special formula's etc)
It is the Company that employs the staff, enters into the contracts of employment and also contracts with 3rd parties, such as suppliers, customers and landlord
The Company can sue and be sued
A Company continues and succeeds until such time as the Company is finally dissolved (by deregistration or liquidation). Therefore a change in shareholding (eg by sale or death) will not affect the survival of the Company
The Company must register for tax and pay tax on all profits received from trading (amonst other taxes)
A Company will distribute the profits to Shareholders in accordance with its dividend policy (usually pro rata to the percentage of shares held by a Shareholder)
If the Company complies with the BEE requirements, the Company can obtain BEE certification

2. Registration, Incorporation & Shareholding

A Company is incorporated / formed by registering a Company at CIPC
On registration, a Company acquires a unique Registration Number (its Identity Number) and is issued with its Company Documents (Certificate of Incorporation & Memorandum of Incorporation)
The Company is formed / incorporated by THE SHAREHOLDERS (not by the Directors)
A Company must have 1 Shareholder and 1 Director
On registration the Shareholders will receive their shares in the Company (evidenced by the share certificates)
The percentage shareholding can be agreed between the Shareholders and is usually pro rata to the contribution made by the Shareholder (which can be in money, assets or skills)
A share gives a Shareholder (NOT A DIRECTOR) a personal right in the Company and the right to receive profits (dividend on distribution), the right to vote and to receive the proceeds on dissolution of the Company. The Shareholder does not obtain any rights to the assets owned by the Company

3. Shareholders and Directors

A Shareholder will own the shares in the Company, which entitles the shareholder to receive a dividend (profit available for distribution to shareholders), a right to vote and a right to share in the proceeds when the Company is liquidated (Not the Directors)
Each Shareholder has a right to appoint a Director (the number of Directors which a Shareholder can appoint, can be agreed between the Shareholders, eg a certain percentage shareholding will entitle a Shareholder to appoint x number of Directors)
A Director is therefore not necessarily a Shareholder. A Director's task is to act on behalf of the Company and to make the day to day decisions of the Company
A Director has no right to receive any dividend (unless also a Shareholder)
Usually when a Company is incorporated, the Shareholders will appoint themselves as the Directors and therefore the Shareholders and Directors will be the same
A Shareholder may also be entitled to remove the appointed Director from office. This does not affect the shareholding, only the Director's position as a Director
A Director owes a duty of good faith and a duty of care and skill to the Company and must therefore act in the interests of the Company. In the case of a Shareholder, there is no such duty. A Shareholder acts for himself/herself (to receive a profit)

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Registration Process

Registration of a Company

In order to register a Company, you need to register the Company at CIPC. The process is relatively straight forward:

Reserve your Company name
Complete the required details for the Company registration: (details of shareholders, details of directors and registered address of the company)
Sign the necessary form from CIPC
You will then be issued with your Company registration documents (including the standard Memorandum of Incorporation)
The Shareholders who incorporated the Company will be identified as the Shareholders or incorporators in the MOI
The Shareholders are entitled to receive their share certificates, evidencing the shares held by them and have their names entered into the share register
If there is more than 1 Shareholder, a Shareholders Agreement should be entered into
Register for tax
Open a Bank account

Cost: R1500 (we include registration, as well as Income Tax registration and BEE certificate)

What documents does a Company have?

On incorporation, CIPC issues the company with a standard Memorandum of Incorporation. The MOI identifies the first shareholders and appointed directors, as well as the basic requirements of a Company, as per the companies Act

Does a Company need a shareholders agreement?

If the company has more than 1 Shareholder, it is advised that the shareholders enter into a shareholders agreement.

What is the difference between a MOI and shareholders agreement?

The MOI is a public document and regulates public matters as regulated by the Companies Act eg the right of shareholder to vote (which is required in terms of the Companies Act)

A shareholders agreement on the other hand is a private document and will regulate matters such as funding of the company, the rights of shareholders to receive profit (the amount), breach and disputes

What do you require to register a Company?

Completion of our form and mandate
Certified copies of directors Identification documents
Payment

How long does it take to register a Company?

If we have received payment and the required documents (completion of our form and copies of Identification documents), usually within 24-48 hours

What is your Cost/Fee to register a Company?

Our Fee is R1500

What does your fee include?

Standard Memorandum of Incorporation
Company Registration
Share Certificates
BEE Certificate
Income Tax Registration
Free 30 minutes consultation for legal advise in setting up your business

How do you terminate a company?

A Company can only be terminated by deregistration or liquidation. Which must also be approved at CIPC

Summary of Features

Own Separate Juristic status

A Company like a human being, has its own independent and juristic status. The Company therefore is completely separate from its Shareholders and Directors.

Registration

In order to be formed, unlike a partnership (contractual), a Company is and must be registered at CIPC in order to be formed. It is the Shareholders of the Company that incorporate the Company

Shareholders

The incorporators of the Company / those individuals or entities that own the shares in the Company, are known as the Shareholders. Shareholders are those individuals that are entitled to receive profit / dividend on distribution

Directors

The Directors are appointed by the Shareholders, they do not necessarily own shares & are tasked with making the day to day decisions. Directors do not have a right to receive profit (unless also a Shareholder)

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Company Documents / MOI

As set out above, on registration of a Company, a Company is issued with Standard Memorandum of Incorporation (the MOI).

The MOI can be defined as the Company’s Constitutive Document, is a public document (open for disclosure by any member of the public) and regulates matters required by the Companies Act.

The Companies Act defines the MOI as a document that sets out the rights, duties and responsibilities of Shareholders, Directors and others within and in relation to a Company and by which a Company is incorporated under the Companies Act.

The MOI does not regulate the agreement between the parties and does not constitute an agreement. For example are there confidentiality obligations, what happens if a Shareholder acts negligently, funding of the Company etc (this is regulated by the Shareholders Agreement).

The MOI can be personalised (to the extent that the changes relate to alterable provisions of the Companies Act) and further in order to be read in conjunction with the Shareholders Agreement.

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Shareholders Agreement

A Shareholders Agreement, on the other hand is a private agreement between the Shareholders and is not open for disclosure by the public.

A Shareholders Agreement will therefore regulate all private matters between the parties, including (but not limited to):

Specific obligations / duties of the parties
Bank Accounts and person authorised to manage the accounts
Funding of the Company
Dividend distribution policy
Restraint and Confidentiality
Breach by a Shareholder
Selling of shares to a 3rd party
Disputes
Termination of the Company

Transferring or Selling your Business

In order to “transfer” your business to a 3rd party or to “sell” your business, either the Shareholders of the Company must sell & transfer their shares (in terms of a Sale of Shares Agreement/Share Purchase Agreement to a 3rd party, or the Company itself must sell & transfer its “business” as a going concern to a 3rd party (in terms of a Sale of Business Agreement). This means that it is not sufficient to merely change directors at CIPC in order to sell or transfer your business.

Sale by a Sale of Shares

As set out above, the Shareholders of the Company, are those who own the shares in the Company. A Shareholder can sell his/her shares to a 3rd party (subject to restrictions). The key features of a Sale of Shares are the following:

Agreement to be entered into: Sale of Shares Agreement / Share Purchase Agreement
What is being sold: The shares held by the Shareholder. For example, the sale could be for the sale of 50 shares held by the Shareholder, which may be equal to 50% of the total shares in the Company)
Seller: The Shareholder
Purchase Price: Value of the shares / or as agreed
Payment of Purchase Price: Payment is made to the Shareholder (NOT the Company or Directors)
Tax: Payable by the Shareholder on the sale
Transfer of Employees: None (only shareholding changes - all contracts with the Company stay the same)
The new MOI must be registered at CIPC. In this regard, a special resolution is required and the amended MOI, together with a Notice of Amendment must be submitted to CIPC for approval. The new MOI must be registered at CIPC

Sale by a Sale of Business

A second way in which a business owner can sell his or her business, is by way of a Sale of Business agreement. In this case the “Business” of the Company is sold as a “going concern”. The key features of a Sale of Business are the following:

Agreement to be entered into: Sale of Business Agreement
What is being sold: The Business owned by the Company, including Fixed Assets, Stock in Trade, Intellectual Property, Contracts, Employees and liabilities
Seller: The Company
Purchase Price: Value of the Business / or agreed
Payment of Purchase Price: Payment is made to the Company
Tax: Payable by the Company on the sale (S11 of the VAT Act applies if the Company and Purchaser are both registered for VAT)
Transfer of Employees: Yes, s197 of the Labour Relations Act applies and Employees are automatically and by law transferred to the Purchaser as new the Employer. The Purchaser as the new employer therefore takes over all the obligations of the Company in respect of the Employees

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What is a Company