Different types of Companies in South Africa and the benefits of Incorporating each

In South Africa the law allows for the incorporation of 5 different types of companies, namely; private companies, personal liability companies, public companies, non-profit companies and state-owned companies. Although one may still see a Close Corporation in operation, they are still considered to be a company under the Companies Act of 2008 however no new close-corporations may be opened.

If you are planning on opening a new company and are unsure of what type of company you wish to open, or for example weren’t aware that there were so many options; it is very important to make sure that you fully understand the consequences that are carried by each different type of company.

A private company are those ending with the suffix “(Pty) Ltd”, upon the creation of such a company, it results in the creation of a brand new and separate legal entity. Prior to the implementation of the Companies Act of 2008, a private company was limited to a maximum of 50 shareholders, this limitation has since been withdrawn. All the rights and responsibilities of the Shareholders are to be clearly stated in the Companies Memorandum of Incorporation.

The benefits of opening a private company include the fact that the company would have a perpetual lifespan (meaning that the company will not cease to exist upon the death of one of its shareholders), shareholders carry a limited liability and only those that knowingly act recklessly and fraudulently will be held personally liable. Transferring a private company is relatively simple, and it is adaptable to both small and large companies. A private Company is not required to file any annual statements with the Registrar of Companies and therefore the shares held in a private company are not available to the general public.

Personal Liability Companies are those that end with the word “Incorporated” or with the suffix “Inc.”, in such a company the past or present directors may be held jointly and severally liable with the company for any misconduct committed or debt incurred during their time of office. This type of company is generally opened by those who are opening a professional practice, for example lawyers, accountants, engineers, doctors, etcetera.

Although the directors may be held jointly and severally liable for the acts of the company during their time in office, the owner of the company will not be held liable, and the owner also has the freedom to decide on the distribution of the profits made by the company as personal liability companies are not as heavily regulated as other private companies. In incorporating a personal liability company, it must be stated in the company’s Memorandum of Incorporation that it is to be a personal liability company.

Public companies are those which are listed on the Johannesburg Stock Exchange and are described with the suffix “Ltd”. Such companies may offer shares to the public however its ability to make pre-emptive share offers are limited. Such companies must have at least 3 directors acting at any given time, they are subjected to be audited annually after which their financial statements must be supplied to its shareholders. Dependant on the size of the company lies the determination as to whether the company should have an Audit, Social and Ethics Committee.

This is not normally the type of company that one would open as a new business, in fact the incorporation of a public company is so heavily regulated that many entrepreneurs may be prohibited from opening such a company in the first place.

The above concerns and limiting steps regarding the incorporation of a public company are necessary in order to protect the public, (remember that public companies may freely offer their shares to the public, and the public require the protection afforded to them by these limitations to protect their best interests). It is not all doom and gloom though; should you be eligible to, and successfully open a public company, you have the opportunity of quickly gaining capital from the sale of shares to the public. The company is treated as a separate legal entity and Shareholder’s cannot be held liable for the acts of the company.

In terms of foreign investment, foreigners as well as foreign entities can own 100% of the shareholding in a South African public company.

A very simple assumption to make, is that if you are hoping to make money, a non-profit company is not the type of company you would wish to open. Neither the incorporators, directors, members, officers or related persons are entitled to any income or property gained by the company.

Such a company may be set up provided that there are at least 3 incorporators and three directors, it is not important whether or not the company will have members or not. Members to a non-profit company are those that participate in the activities set up by the non-profit company. These could include activities by a church for example; working at a soup kitchen etc. If you would like to receive grants or donor funding for the company then one would have to apply to the Department of Social Development, they may also apply for funding from the National Lottery Board.

A state-owned company or state owned entity (SOE) are those that play a significant role in the South African economy, they are companies that are substantially or partially owned by the state, for example, the Airports Company of South Africa is fully government owned, the government owns the majority of Eskom and Sasol is only 27.3% government owned.

A state-owned company is not determined by the amount of ownership that the Government has within that company, but rather on the purpose of the company and the interest the government has in that company. Unfortunately, the governments interests in such companies will often compete with or even discourage foreign investment.

The Department of Public Enterprises minister has publicly stated that South Africa’s state-owned companies should aim to improve economic transformation, industrialisation and import substitution.

Although not all of these companies may be specifically of interest to you, it is important to know all of the pros and cons of opening a specific type of company prior to taking steps towards opening the company. On that basis it is best to consult with someone who understands your needs, will protect your interests and act in a way to provide you with the highest chances of success.

Duncan O’Connor

Candidate Attorney