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As the future of an economy, businesses are the future of a country. It is therefore very important that each business owner recognises their responsibility to greater society while they are considering their personal goals.
The unfortunate reality is however, that many businesses under-perform or die before they have actually lived because of poor planning.
We promote helping our clients make informed decisions and implement strategies that consider their specific circumstances and promote their best interests. I will now briefly discuss some key considerations needed to facilitate proper planning.
Choosing the right vehicle
There are various corporate entities — also called juristic persons — available when electing to start a business. These include:
- Business Trust (although it does not have a separate legal personality)
All companies and corporate entities (save for co-operatives and trusts), regardless of size, have been unified under one legislative banner. The Companies Act 71 of 2008 as amended extensively regulates the formation, management, governance and deregistration or termination of companies.
There are various aspects to consider when electing which company structure (for example, a private or public) is best. Generally, however, a company offers a limited liability and separate legal personality from its members (shareholders). From an estate and continuity planning perspective, this is a great advantage. It is also useful in protecting personal assets from business creditors.
However, remaining compliant with various regulations however present some practical challenges, particularly with regard to management, accountability and administration such as directors duties (management duties). An annual return must be filed with the Companies and Intellectual Property Commission (CIPC) each year to prevent deregistration. Some companies must meet auditing requirements, and bigger structures face more complex governance and related issues.
Another vehicle to consider is a co-operative. Regulated by the Co-operatives Act 14 of 2005, a cooperative is an autonomous association of persons who have united voluntarily to meet their common economic and social needs through a jointly owned and democratically controlled enterprise.
This is very similar to a company structure and has the same advantages. But one major difference lies in the fact that every member only holds one vote, regardless of shareholding. These enterprises are particularly useful when smaller operations want to stand together to take advantage of bulk buying or association with one another for mutual benefit while retaining their individual business autonomy.
Another vehicle that is quite widely applied, specifically in the real estate development and related industry, but not always fully considered, is a Trust. Trusts are regulated by the Trust Property Control Act 57 of 1988.
In most instances Trusts are not suitable vehicles with which to conduct business. Among other reasons, this is to the lack of limited liability or separate legal personality from its members, along with the normal income and capital gains tax obligations.
On a practical level, the administration of Trusts is generally extremely challenging because the Master of the High Court does not have a national automated system, unlike the CIPC. This lack of automation makes it extremely time consuming and challenging to amend or obtain certain documents. In addition, unlike Companies and Co-operatives, from a due diligence perspective Trust records are difficult to research because of the nature of the Master of the High Court’s record keeping structures.
However, there are instances where a Trust can be very useful, such as broad-based black economic empowerment (B-B BEE) structures and employee share schemes. Trusts are generally still very useful and relevant in estate planning, when the purpose is to preserve assets or to look after minor children after the death of their parents. Therefore, a Trust structure may play a role in the planning process, where applicable.
It is therefore crucially important that all the appropriate vehicles are properly investigated before starting a business and again when the business is expanded. Due consideration should be given to the specific circumstances and vision of the business owner, which will inform the most appropriate vehicle to implement.