What are the different types of companies in South Africa?
By J’Retha Rossouw
Identifying the structure or type of entity to suit your company’s needs, is vital to any successful business. This decision will largely impact on the manner in which the company is administrated and regulated, and has to suit the nature of your business and its memo operandi.
The Companies Act 71 of 2008 differentiates between two types of companies – companies that trades for profits, and those that don’t, more generally referred to as profit companies and non-profit companies. The law then further differentiates between four types of profit companies, namely a private company, a public company, a state-owned enterprise (hereafter SOE) and lastly, a personal liability company.
This article will succinctly explain the different companies available in South Africa, and address their unique features to assist business owners in identifying the most effective entity to celebrate their company’s peculiar features.
1. PRIVATE COMPANY
The private company structure is by far the most common type of company registered in South Africa, due to its efficiency and simplicity. Property Limited, or its abbreviation (Pty) Ltd, refers to a company that trades for profit, and such a company can exist into perpetuity, irrespective of any shareholder change.
One of the many advantageous to a private company, is its legal nature. It is regarded as a separate juristic entity with rights and duties of its own. Consequently, the shareholders have limited liability and are generally not responsible for the liabilities of the company, and thus poses a lesser risk to its shareholders.
Transfer of ownership is fairly easy to uncomplicated, it provides for an effective manner to ensure that management is maintained, and it also adaptable to both any size of business, regardless of whether it is only starting out or grown into an empire.
Important features of a private company include the following:
- There must be at least one director, and one shareholder;
- No restrictions on the number of shareholders;
- There exist certain restrictions on the transferability of company shares;
- The company is prohibited from selling shares to the public or listing them on the JSE;
- An annual meeting must be held within 18 months of the company’s incorporation, and thereafter, the meetings are not to be held later than 9 months after the end of each financial year;
- The suffix for a private company is (Pty) Ltd.
2. PUBLIC COMPANY BUSINESS STRUCTURE
A public company is considered to be a juristic entity, that exists separately from its owners and shareholders, and can exist for perpetuity. A public is similar to a private company in that they are both considered to have a legal personality, and consequently, the shareholders of public companies have limited liability. 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.
Important features of a private company include the following:
- There must be at least three directors and seven shareholders;
- Only public companies may be listed on the JSE;
- A public company can freely transfer its shares to any member of the public;
- They must be audited and must produce audited financial statements;
- The auditor cannot serve for a period of more than 5 years;
- In some instances, it is a requirement to have an Audit Committee and a Social and Ethics Committee;
- 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 suffix for a public company is Ltd.
WHAT IS THE MAIN DIFFERENCE BETWEEN A PUBLIC COMPANY AND A PRIVATE COMPANY?
Firstly, a private companies’ shares are held privately, for example, by the company’s founders, a group of investors or shareholders. Shares can thus not freely be transferred nor can it be offered to a member of the public, thereby protecting the shareholder’s interests.
A public company, on the other hand, imposes no restrictions on the transferability of its shares to third parties, thereby ensuring that it has a relatively easy access to capital.
3. PERSONAL LIABILITY COMPANY
A personal liability company refers to a private company that trades for profit and is generally used by professional associations such as attorneys, engineers and stockbrokers who wish to utilize some of the entities’ many advantageous, such as its perpetual succession and flexible profit distribution. The company’s suffix is “Incorporated” and it operates on the principle of personal liability, which entails that the directors of the company are jointly and severally liable with the company for all contractual debs and liabilities incurred when they held their positions.
4. NON-PROFIT COMPANY
A non-profit company refers to a company that is incorporated for public benefit or other object relating to one or more cultural or social activities, or communal or group interest.
To successfully register a non-profit company, there must be at least three incorporators and three directors. It is important to note that it is not a requirement for these types of companies to have members, and it is thus possible to register such a company without any members.
5. STATE-OWNED COMPANY
It is significant to differentiate between state-owned entities and state-owned enterprises. A state-owned entity, or a national government business enterprise is defined in the Public Finance Management Act 1 of 1999 as an entity which is is a juristic person under the ownership control of the national executive and has been assigned financial and operational authority to carry on a business activity as its principal business, provides goods or services in accordance with ordinary business principles and is financed fully or substantially from sources other than the National Revenue Fund or by way of tax, levy or other statutory money.
The term thus refers to legal entities that are created and governed by the government to undertake commercial activities on its behalf.
Within these state-owned entities, one finds the state-owned enterprises. A state-owned enterprise is an independent body that is either partially or solely owned by the Government of South Africa, and is listed under Schedule 2 of the Public Finance Management Act 1 of 1999.
The most important and potentially challenging step when opening a business, is deciding which business structure to register. What once seemed to be an exciting journey, can quickly turn into a menacing and potential calamity where the incorrect entity is chosen, which does not accommodate the business’s needs.
Contact our Commercial Lawyers in Johannesburg for more information and or to book a consult.