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Forms of business enterprise – Companies

Article provided by Adams & Adams

A company is an attractive form of business entity for people that do not want to tie their personal assets into their businesses. Unlike a sole proprietorship, a company exists independently of its members (referred to as shareholders) and the debts of the company can normally not be recovered from its shareholders in the event that the company is liquidated.

Incorporation of a company

In order to incorporate a company the incorporators must complete and sign a memorandum of incorporation (MOI) and then file a notice of incorporation with the Companies and Intellectual Property Commission (CIPC). Both these documents are available for free on the CIPC’s website and at their offices. After the documents are lodged, the CIPC will issue a registration certificate. At that point, the company comes into existence as a separate legal personality and it may commence business.

Types of companies

There are two types of companies, namely profit and non-profit companies.

Profit companies

There are four types of profit companies: namely, private, personal liability, state-owned and public companies:

  • private company must simply have a minimum of one shareholder and one director. The company’s name must still end with the expression ‘Proprietary Limited’ which is often abbreviated to ‘(Pty) Ltd.’
  • personal liability company must have at least one shareholder and one director. The company’s name must end with the expression ‘Inc.’
  • state-owned company is a company owned by the state. The company’s name must end with the expression ‘State-Owned Company’ which is often abbreviated to ‘SOC’.
  • public company must have a minimum of one member and three directors. The public company’s name must end with the expression ‘Limited’ which is often abbreviated to ‘Ltd.’. This is a more complex type of company as it needs to appoint auditors, an audit committee, a social and ethics committee, a company secretary and have its financial statements audited annually.

A private company is the more preferred type of company because it does not have to comply with the onerous requirements of a public company. Personal liability companies are normally incorporated by attorneys or auditors or similar professions which require personal liability, and the directors of such companies are liable for the companies’ debts. Private companies are restricted from offering shares to the public but public companies may offer shares to the public.

Non-profit companies

A non-profit company (NPC) is a company formed for a public benefit. It must be formed by at least three persons and have at least three directors. The profit of the company cannot be distributed amongst its shareholders. The name of the NPC must end with the expression ‘NPC.’

The Board of Directors

A company is run by a board of directors. The directors must act in the best interests of the company. Even though the shareholders of the company are not liable for the debts of the company, the directors may be held financially liable for not acting in the best interests of the company.

Appointment of Directors

There are three ways to appoint directors:

  • where the MOI of the company provides for the appointment of a director
  • where the board of directors appoints a person to fill a vacancy, or
  • where the shareholders nominate a candidate and vote. If the candidate receives a majority of the vote then he/she will become a director.

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