Some practical considerations when starting or building a successful business enterprise – what every business owner should know!
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.
At Schoeman Attorneys we are committed to helping our clients make informed decisions and implement strategies that consider their specific circumstances and promote their best interests. We will now briefly discuss some key considerations needed to facilitate proper planning.
There are various corporate entities — also called juristic persons — available when electing to start a business. These include:
2. Close Corporation (which may not be incorporated any longer since the enactment of the new Companies Act on 01/05/2011)
4. Business Trust (although it does not have a separate legal personality)
(see also: THE TAX BENEFITS OF A SMALL BUSINESS CORPORATION)
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 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.
Compliance with other relevant legislative provisions is essential, including: choosing a suitable, properly zoned premises; scrutinising your commercial lease agreement before signing it; compliance with the relevant tax laws; having professionally drafted employment contracts; and implementing the relevant policies and procedures to ensure that your internal business documents — whether company documents (memorandum of incorporation), trust deed or a co-operative’s constitution — is aligned with the business plan and with legal compliance.
It is therefore essential that you engage a professional to complete these tasks.
Identifying your target market is specifically relevant when you are and contracting with government or big corporates and you are required to comply with legislation such as B-B BEE (Act 50 of 2003). If government or big corporates fall within your current or future target market, it is essential to ensure that your business plan, company documents and related employment and investment strategies align with your B-B BEE strategy. If you are proactive and align these from the outset, you will be better able to win and retain valuable client contracts.
The next important legalisation to consider is whether your transactions will fall within the requirements of the Consumer Protection Act 68 of 2008. Generally, the Consumer Protection Act is a law of general application and therefore applies to every transaction between a consumer and supplier within South Africa. However, because of their size, certain juristic persons (specifically large juristic persons) are excluded from the protection given to consumers under the Act. Although we do recommend that companies comply with the Consumer Protection Act and commit to rendering a high quality service towards consumers, in a certain sense lawful non-compliance does offer more contractual freedom.
At Schoeman Attorneys we specialise in a range of services designed to best serve both individuals and businesses. These services include commercial or business law, contract drafting, mining law, civil litigation, antenuptial contracts, wills and estate planning. We believe that through proper planning in structuring business affairs and by implementing risk aversion strategies it is possible to pave the way forward for business growth that will result in the creation and sustenance of wealth.
Taking this approach, the individual behind the business will be able to structure their personal affairs most effectively to allow them to enjoy the fruits of their hard-earned money.
This is why we recommend that each person, regardless of whether they are a business owner or not, implements estate and personal planning strategies that includes a professionally drafted will. We also further recommend that you regularly update your will and appropriate estate plan so you can protect the fruits of your hard earned labour from unnecessary risk.
We often compare the integration of these services with the construction of a house. At bottom level is the foundation, which is the antenuptial contract that directs many of financial decisions that will follow in a person’s lifetime. Above the foundation are the walls of the house, which are the business structuring, contract drafting and the personal financial planning strategies that a person will implement during their lifetime to create revenue and create sustainable wealth. Last but not least is the roof, which is the will that protects everything that has been built up below it, keeping the contents safe and ensuring a lasting legacy.
Buildings with cracked foundations, poorly constructed walls or inadequate roofs never stand for long. It is therefore essential that a professional deals with all these aspects.
Just as it is important to choose the right product or location, it is equally important to choose the right business vehicle. Choose an attorney who can be a partner through your journey as you build your business implement personal planning strategies.
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Nicolene Schoeman, Schoeman Attorneys (Cape Town)