“My best entrepreneurial advice is to start” (Dave Morin, entrepreneur, angel investor, CEO and co-founder of social network Path)
In our last article in the series “Choosing the right legal entity for your business” we looked at the partnership option. Let’s move on to the private company option, where your business is owned and operated, not by you as an individual or by a group of individuals, but by a “(Pty) Ltd”.
Although CCs (close corporations) still exist, no new ones are registered, so we will not consider them here other than to note that the owners of a CC are “members” not “shareholders”).
What is a private company?
Our law treats a private company as a separate legal entity, a “judicial person” with its own “legal personality”. It exists in law separately from its managing officials (directors and management employees) and its owners (shareholders). You can have as many shareholders as you want (the old limit of 50 has fallen away).
Your personal assets are separated from your business risks. In fact the whole concept of modern laws recognising separate “corporate entities” traces its roots back to the idea that entrepreneurship would be encouraged when individuals could limit their trading liability to their own investment in the business.
Like sole traders and partnerships, a company can use a separate “trading as” name like “XYZ Enterprises (Pty) Ltd t/a Plucky Plumbers” perhaps. But it’s always the actual company that trades, contracts and pays tax.
7 advantages of private companies…..
….. and 3 disadvantages
The tax angle
It is impossible to give general advice here; seek specific guidance on what is the most tax-efficient entity or structure of entities for your particular situation. Consider the different tax rates applying to corporate entities for income tax, capital gains tax, transfer duty etc; also the implications of dividend tax, estate duty, exemptions and rebates only available to individuals and so on.
The bottom line is this - take full professional advice on both the legal and the tax implications of using each type of entity before choosing.
This is the fourth article in our series “Choosing the right legal entity for your business”. Next time we’ll look in more depth at the business trust option.
“When you’re talking about building a house, you’re talking about dreams” (Architect Robert Stern)
There are many advantages to buying a vacant plot on which to build your dream house in a property development, but there are also potential risks to be managed. Discuss the pros and cons with your lawyer before you agree to anything.
“Build, or Lose the Plot”
A recent High Court case illustrates one such danger – not building on your plot within whatever time limit is specified. Often developers will impose penalty levies for such failure (the penalties must be reasonable, but will still hurt your pocket) but in this case the defaulting buyer stood to lose the whole property –
The outcome - “Bye-bye plot”
The trust’s defences to the developer’s claim for retransfer all failed -
The trust was therefore ordered to retransfer the property to the developer. It loses the plot itself, all capital appreciation in it, and 3 years’ interest on its R840,000.
“She just did not want to be liable if he defaulted, a common regret felt by those who stand surety for defaulting debtors” (extract from judgment below)
In the beginning ….. You are totally relaxed. The bank won’t give your son/daughter/spouse/partner/company/friend a loan unless you sign surety and, as always, it seems perfectly safe at the time. So you ask yourself “What’s the harm? It’s just bank red tape. Johnny’s new business will fly. He’ll pay back every cent to the bank and I’ll have helped him. That’s a parent’s job isn’t it?”
But in the end ….. You get stung. Your signature comes back to haunt you, because our law will generally hold you to what you sign, with very little wriggle room.
A recent High Court case illustrates.
The mother, the son and the suretyship
Let the signer beware – “I signed by mistake” won’t cut it
This defence, said the Court, amounted to a mistake on the mother’s part in signing the document. That’s a defence that our law won’t accept unless you can show that your mistake was both material and reasonable. You will have to prove that you had no intention of entering into the contract and that you were misled by a misrepresentation as to the nature of the document, or as to its terms.
Our law strongly presumes that if you sign a document you intend to enter into the transaction it contains, and the principle of “let the signer beware” (“caveat subscriptor” to the legal fraternity) makes it difficult to succeed with any form of “I signed by mistake” defence.
On the facts of this case the Court rejected the mother’s version of events as false, found that she knew exactly what kind of document she was signing and indeed intended to stand surety, and ordered her to pay the bank in full plus interest and costs on the attorney and client scale.
Whether we’re talking about your business or your private life, sticking to your goals and resolutions can be as hard as it is important. Multiply (x3) your chances of succeeding with the free goal-setting platform stickK.com (the “K” stands for the Commitment Contract you enter into).
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“Post-truth”, adj. – “Relating to or denoting circumstances in which objective facts are less influential in shaping public opinion than appeals to emotion and personal belief.” Chosen by the Oxford Dictionaries as their word of the year following a 2,000% increase in usage following Brexit and the US Presidential election.
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