Business and Investment Entities

Due Diligence

When a business or company is acquired, then the purpose of the due diligence exercise, is to determine appropriate tactics and strategies for the negotiation of the transaction. It is necessary to scrutinize what is been acquired, how to acquire it, and to ensure that the transaction under consideration is practicable to implement. This is particularly apt in regard to the structure of the transaction, the offer price and warranties.

The Companies Act and the Close Corporations Act, control business entities and stipulate accounting and reporting requirements. The Companies and Intellectual Property Registration Office (CIPRO) - formerly the Registrar of Companies, whose offices are in Pretoria, administer the Act. Both local and foreign owned companies are regulated by the same rules. All businesses must register with the South African Revenue service for: income tax, value added tax, employees’ tax, provincial and regional services levies, workmen’s compensation, and the Unemployment Insurance Fund. Business licences are required for certain activities and are generally easily obtainable from the licensing authorities, subject to compliance with the relevant requirements.

Companies Bill and Corporate Laws Amendment Bill

A draft Companies Bill 2007 (‘Companies Bill’) was released for public comment, and is expected to replace the Companies Act in 2008. The latest Corporate Laws Amendment Bill, passed by Parliament in October 2006, addresses critical questions, like the promotion of Broad Based Black Economic Empowerment (BBBEE), and the alignment of the Companies Act with the provisions of the Auditing Profession Act (APA), which came into force on 1 April 2006.

From a commercial perspective, the most significant amendments aim at regulating:

• the financial reporting standards applicable to companies;
• the facilitation of shareholder diversification and BBBEE by changing the provisions relating to financial assistance to shareholders for the purchase or subscription of its own shares;
• the protection of minority shareholders in the event of takeovers; and
• various technical amendments relating to the increased use of electronic communications.

Website: http://www.cipro.gov.za

Physical Address: The Dti campus (Block F - Entfutfukweni), 77 Meintjies Street, Sunnyside, Pretoria.
Postal Address: PO Box 429, Pretoria, 0001.
Docex: 256 Pretoria

Customer Contact Centre:
Tel: 0861 843 384
Fax: 0861 843 888
International Tel: +27 (0) 11 254 9405
International Fax: +27 (0) 11 254 9406
Email: contactcentre@cipro.gov.za

Business Entities
There are several types of businesses that can be conducted in South Africa by: individuals, partnerships (including limited partnerships) trusts, close corporations, companies or branches of foreign companies. The decision as to which is most appropriate will depend on numerous factors, including: how the business be managed, the number of participants, the need for limited liability and tax transparency.

Sole Proprietorship
There are no statutory regulations relating to registration of a sole proprietorship, except that proper books and records of trading activities must be maintained and a balance sheet and income statement must be submitted each year to the Receiver of Revenue, together with the owner’s private tax return. In the event of insolvency of the business, the proprietor’s private estate is liable to make good any deficiency in the business. Any income earned by the sole proprietorship is taxable in the owner’s hands.

Company
A limited liability company which may be public (name ends in Limited) or private (name ends in Proprietary Limited).will generally be the most suitable investment vehicle, since it allows great flexibility and can be used for joint ventures. There is no minimum equity capital requirement for companies. The following characteristics and requirements apply to each:

• Separate legal personality;
• Limited liability;
• An auditor must be appointed;
• Profits remitted by way of dividends to an offshore parent company are not subject to withholding tax; and
• There is no requirement that there be any local shareholders or directors.

The registration of a new company takes two months, requires 5 proposed company names, in case the first name is deemed unsuitable by CIPRO, and full details of the shareholders and directors. Namely: names; addresses; dates of birth; passport copies; and shareholding percentages.

In many cases, the purchase of an existing shelf company may be more convenient. The shelf company may be adapted to suit the requirements of the new business.

Company registration must occur prior to the opening of bank accounts, registration for tax, regional levies and value added tax (VAT), as well as the importing of machinery and raw materials.

Private Company
The private company is the most common vehicle for operating a business in South Africa. Private companies are identified by the words ‘(Proprietary) Limited’ or ‘(Pty) Ltd’ after the name of the company; and there are no requirements to have a local director or shareholder. The articles of association of the company must restrict the right to transfer the shares of the company, must limit the number of members to 50, and must prohibit any offer to the public for the subscription of any shares or debentures of the company.

Copies of audited financial statements need not be lodged with the Registrar of Companies, nor need members be provided with half yearly interim reports and provisional annual financial statements. Private companies must have a minimum of one member and at least one director. Directors are not required to hold qualification shares;

Public Company
Public companies are identified by the word ‘Limited’ after the name of the company. A public company must have a minimum of seven shareholders but there is no limit on the maximum number of shareholders. Directors need not hold qualification shares and need not be residents or nationals of South Africa. There are no requirements for a local shareholder. There is no restriction on the transfer of shares. The company must file its annual financial statements and interim reports with the Registrar of Companies, where they will be available for inspection by the general public during the Registrar’s office hours. Public companies may raise capital from the general public and are capable of being listed on the JSE Limited. A minimum of two directors is required.

Incorporated Companies

Section 53(b) Companies are identified by the word ‘Incorporated’ or ‘Inc.’ after the name of the company. The Companies Act allows any private company to provide in its memorandum of association that the directors together with the company are jointly and severally liable for all debts and liabilities of the company incurred during their term of office. Certain professional persons, such as attorneys and accountants, who are statutorily prevented from enjoying limited liability, may incorporate a Section 53(b) company to regulate their affairs with the benefit of corporate existence and perpetual succession.

Branches Of Foreign Companies
A subsidiary of a foreign company is regarded as a South African company. The legal liability of the parent company is limited to the amount of share capital committed (together with any guarantees provided to any individual creditors). With the exception of banking and insurance companies, any foreign company incorporated outside South Africa may establish a place of business and carry on its activities in South Africa, without being required to form a separate locally registered company. A branch of a foreign company is regarded as an external company if it establishes a place of business or owns immovable property in South Africa, and must register as such.

The legal liabilities of a branch are not limited to the extent of its South African assets.

The establishment of a branch of a foreign company requires registration of that company as an “external company” within 21 days after establishing a place of business in South Africa. An external company need not have a South African resident director, nor is required to appoint a local board of directors, but must appoint a person resident in South Africa who is authorized to accept any notices served on the company.

A branch is obliged to lodge a certified copy of its Memorandum and Articles of Association (or other instrument defining its constitution) with the Registrar of Companies, as well as a sworn translation into English where appropriate.

Two primary requirements for a branch are:

1. An annual audit, and

2. Financial statements must be lodged with the Registrar of Companies. (Financial statements must also be lodged for the company as a whole. Exemptions renewable every 2 years, may be obtained in certain circumstances.)

In certain circumstances it may be more beneficial to register a South African company, for example, for an enhanced image or easier access to credit facilities. It may also be an advantage when obtaining government contracts.

Close Corporation
Close corporations are a simpler form of corporate structure suited to the needs of smaller businesses. They are a popular form of business entity, which allows corporate status and a legal identity distinct from the members.

All South African close corporations are governed by the Close Corporations Act, which is administered by the CIPRO. A close corporation must have at least one but no more than ten shareholders, who must be natural persons, including non-residents. Foreign individuals sometimes use the close corporation but use is limited because exchange control regulations are applied more strictly to such entities. An annual audit is not mandatory. Because companies may not hold shares in close corporations they are not available to foreign companies wishing to invest in the country. The liability of members is limited similarly to that of private companies. The letters CC or close corporation at the end of the name indicates the status of the company. A close corporation is managed by its members and does not have a separate board of directors.

Registration of a close corporation requires a founding statement that must be filed with CIPRO (which has also taken over the function of the former Registrar of Close Corporations). A private company that meets the requirements of a close corporation may convert to a close corporation, and a close corporation may convert to a private company.

Partnerships
Any form of business, with few exceptions, may be carried out in South Africa by a partnership. However, the Companies Act prohibits any unincorporated company, association or partnership from having more than 20 persons, except in the case of certain professional partnerships, such as lawyers and accountants, where there is no limitation on the number of partners. Formation by a written partnership is desirable but not essential, and verbal agreements are binding on the partners. Partnerships are governed by common law and subject to general principles of law of contract but if a partnership agreement exists, it would then take precedence. Partnerships must keep proper books and records and submit a copy of the partnership balance sheet and income statement in support of each individual partners personal annual tax return. No details of the financial position of the partnership need to be made known to the public.

Joint Ventures
Joint ventures are formed for carrying out some specific purpose. As joint ventures are formed on an agreement between two or more parties, the joint venture may be constituted as partnerships and as such are subject to the common law relating to partnerships. Alternatively, the joint venture may take the form of a company, with investment by the nonresident participants in agreed proportions.

Benefits of Joint Ventures

• Obtain consumer franchises or entry into a new business field.
• Allows globalisation of companies by providing a foundation to negotiate ethnic, business and cultural boundaries to penetrate a specific geographic market.
• Companies acquire means of distribution, a manufacturing base or raw material source.
• Increased effectiveness of existing marketing efforts and expansion of existing product lines.
• Learn newly developing market needs.
• Create competitive edge in market.
• Acquiring new human resources, skills and knowledge.
• Convenient means to divest.
• Allowing principles of Black Economic Empowerment to be effected.

Private Public Partnerships
A number of opportunities for joint ventures exist in South Africa especially in private public partnerships (PPPs). The use of PPPs to deliver public services is a relatively new process in South Africa. The approach to implementing and managing PPPs differs between government departments and different municipalities. In many cases local authorities are keen to collaborate with investors in areas, where they have limited resources and expertise in specific projects such as those relating to developing infrastructure. There is also a need to create economic growth in an efficient manner with consequent spin-offs of skills development and employment creation. Thus, the area of PPPs is expected to offer numerous opportunities for investors.

A PPP is usually a contract awarded by a public sector organisation or department to a private sector organisation or firm to carry out part of its service delivery or administrative functions. The private sector organisation assumes the associated risks of carrying out the function and, in return, it is paid a fee linked to certain performance criteria.

Government and the mining industry recognize that one of the means of allowing all to benefit from the exploitation of mining and mineral resources is by encouraging greater ownership of mining industry assets. Strategic joint ventures or partnerships are appropriate vehicles for this to occur.

In committing to a contract for a PPP, it is important that at least the following aspects are covered:

• Time period of the contract;
• Specific service deliverables and outputs;
• Payment formula;
• Management relationship between public sector department and private sector contractor;
• Penalties and termination in case of default;
• Technology transfer between contractor and department and vice versa;
• Process for dealing with specification and content changes within the contract period;
• Protection of intellectual property of both parties;
• Processes of consulting and dealing with organised labour;
• Environmental aspects, which need to be addressed.

Co-operative
A co-operative is organized to provide a service to members and in South Africa that service is commonly providing employment to members. The Co-operatives Bill defines a co-operative as “an autonomous association of persons united voluntarily to meet their common economic and social needs and aspirations through a jointly owned and democratically controlled enterprise”.

Among other things, the new legislation aims to define the formation, registration, management and structure of co-operatives, as well as provides for the establishment of an advisory board to set policy for the development of such enterprises. The government sees the promotion of co-operatives as a means of alleviating poverty, and promoting equity and greater participation of black people, especially residents of rural areas, in the country’s economy.

Trust
A trading trust is a form of unincorporated business organization created by a deed under which property is held and managed by trustees for the benefit and profit of beneficiaries designated in the deed. The Trust Property Control Act governs all trusts.

Trading trusts are not widely used in South Africa today but may still be appropriate for certain types of businesses, for example property development enterprises.

The number of trustees of a trading trust is also limited to twenty persons in terms of the Companies Act. In general, a trading trust is not a separate juristic person distinct from its trustees. However, for income tax, VAT and transfer duty purposes, a trading trust may be treated as a separate person. Trustees require the authorization of the Master of the High Court to act as trustees. Actions by trustees prior to the issue of such authorisation are void.

Factory
The establishment of a factory generally requires the consent of several different Government departments. The industrial development branch of the Department of Trade and Industry provides an advisory service covering all aspects of the establishment or expansion of industrial undertakings in South Africa.

Franchising

Recent years has seen the popularity of franchising in South Africa rise significantly, emerging as one of the key economic sectors for starting and growing a successful business. South Africa is the most developed country in Africa for franchising and not only does it provide great potential for Western-based franchise systems, but it has also grown many successful indigenous systems

Business format franchising is by far the most popular franchise format, and opportunities are available in many different industry sectors, including:

• Quick service and sit-down restaurants
• Automotive services
• Real estate agencies
• Business services
• Home repair services

Convenience stores and other retail outlets, to name just a few.

http://www.whichfranchise.co.za