A Guide for Small Business Owners for Setting Up a Private Company in South Africa

Sep 29, 2023

Introduction

Starting a company in South Africa requires entrepreneurs to navigate many legal and regulatory requirements. One crucial early decision for business owners is determining the ownership structure of their business. This choice will have an impact on the legal requirements for your businesses, including reporting, compliance and tax requirements; as well as your exposure to personal liability. Moreover, the business structure should align with your growth and exit strategy, as well as the nature and complexity of your business.

Among the various structural types available a private company stands as one of the most common and popular choices. Other options include sole proprietorships and partnerships to public companies, business trusts and personal liability companies.

Establishing and operating a private company comes with specific responsibilities. This guide explores the key considerations, processes, and obligations that small business owners need to be aware of.

Read: Choose the Right Type of Ownership for your SME

What Is A Private Company?

A private company is a type of business structure available to business owners in South Africa, previously known as close corporations. It’s easy to identify a private company by its name, as it typically ends with the words ‘(Proprietary) Limited’ or ‘(Pty) Ltd’.

What makes a private company distinct is that it’s regarded as a separate legal entity from its shareholders and directors, “with rights and duties of its own” and as such, is required to register as a taxpayer.

A company possesses key characteristics that define its structure and operations, including:

The Pros And Cons Of A Private Company

There are a number of advantages to establishing a private company. The most significant benefit of this ownership type is that it limits company directors’ personal liability for company debts. “This means that the shareholders’ assets are protected if the company goes into liquidation” and are offered protection from creditors.

Other key advantages of the private company structure are as follows:

  • Provides a professional image to the business for customers and investors.
  • Offers tax benefits.
  • Relatively easy to transfer ownership.
  • Easy to raise capital either through the issuing of new shares, taking out loans, or issuing bonds.
  • The life of a private company is perpetual, which means it continues uninterrupted, even if shareholders change, thereby the efficiency of management is maintained.

While private companies hold many benefits, there are disadvantages. This kind of ownership structure is subject to many legal requirements which makes it more difficult and expensive to establish and operate than other forms of ownership such as a sole proprietorship or partnership.

Additional disadvantages are as follows:

  • At least one director is required.
  • Shares may not be offered to the public and cannot be listed on the stock exchange.
  • A minimum of two shareholders are required for a meeting, except in the case of a one-person company.
  • Annual financial statements must be audited with some exceptions in terms of the new Companies Act.
Memorandum Of Incorporation (moi) And Shareholder Agreements

The Memorandum of Incorporation (MOI) governs the relationships between key stakeholders and a company. However, a Shareholders Agreement takes it a step further and defines the rights of each shareholder and how the company should be managed.

Let’s look at each of these in greater detail.

Shareholder Agreements

The agreement is an internal document that does not need to be filed with the CIPC. While not compulsory, a shareholders’ agreement has some benefits for companies as it protects the rights and interests of the shareholders. It also details each shareholder’s responsibilities, rights and obligations so there can be no disputes later on.

What to Include in a South African Shareholders’ Agreement

A company’s shareholders’ agreement should cover the following basic considerations:

Board of Directors

Including the following:

  • the maximum number of directors
  • the percentage of shares required to become a director
  • how a director can be removed
  • board meeting protocols
  • voting protocols

Capital Raise

Details how the company will raise funds including how shareholders are required to contribute as start-up capital, additional capital requirements and profit-sharing between shareholders.

Roles and Responsibilities

Stipulates the roles and responsibilities of each shareholder within the company, where applicable.

Shareholder Economics

Including the following:

  • the shareholding of the shareholders
  • the different authorised share classes (if applicable)
  • the rights attached to each share class
  • any restrictions on specific shareholders

Issue of New Shares

Covers the rules about issues with the shares. Usually, new shares are first offered to existing shareholders on a pro-rata basis.

Sale of Shares

Details on how a shareholder can sell his shares in terms of process, notices, time-lines, valuation and method.

Deadlocks and Disputes

Sets out how to resolve disputes, and what actions will be taken. A deadlock provision outlines actions for situations where the shareholders cannot agree.

Anti-dilution Protection

This provision regulates the raising of capital to avoid diluting existing shareholders.

Memorandum of Incorporation (MOI)

All companies must have a MOI which sets out the rules agreed to by the shareholders for the management and maintenance of the business.

According to the CIPC, private companies may be registered with a standard or a customised MOI. The standard MOI is provided by law and is integrated into the company registration process. A customised or non-standard MOI allows shareholders to impose certain conditions or waive certain requirements, such as an audit requirement. Such MOIs must be attached to the applications and may require the assistance of a legally qualified person or someone with company secretarial knowledge.

Share Capital And Ownership Structure In Private Companies

The MOI stipulates a company’s authorised share capital, which refers to the number of shares authorised. The number of shares is set during the registration process and is reflected on the incorporation certificate, available from the CIPC. All companies must have at least one share, and thus, at least one shareholder, in order to be validly incorporated as a private company.

While there is no limit to the number of shares that can be allocated, the usual number is 1 000 shares allocated. After registration, if the company is a newly registered entity, the shares will be ‘issued’ to the shareholder(s).

Once the shares are issued, the authorised directors will provide the shareholder(s) with a share certificate and the name and details of the shareholder will be entered in the company’s register of members. The share certificate confirms your ownership and allows the shareholder to exercise their rights as a shareholder.

Legal Legends states that the share certificate needs to contain the following details:

  • The share certificate number, which must be sequential and unique.
  • The number of shares issued.
  • The type of shares issued (remember, all shares issued under the new Companies Act (2008) have no par value).
  • The name and registration number of the Company (the Issuer of the shares).
  • The registered and postal addresses of the Company.
  • The name of the person or entity to whom the shares are issued — the shareholder.
  • The identity number or registration number of the shareholder.
  • The address of the shareholder.
  • The signatures of the director(s) and the company secretary, if applicable.
Taxation And Financial Obligations For Private Companies

There are a number of tax obligations and requirements for private companies, including corporate income tax, VAT, PAYE (Pay-As-You-Earn), and employee tax. It’s therefore important that businesses ensure they adhere to proper financial record-keeping, annual financial statements, and auditing requirements.

Below are taxes that are relevant for a private company.

1. Corporate Tax

Private companies are required to pay Corporate Income Tax on their profits twice a year. Taxable profit is defined as gross income generated minus related tax-deductible expenses. According to SARS, in addition to annual tax returns, every company is required to submit provisional tax returns (IRP6). The first of these returns are required to be submitted six months from the start of the year, and the second at year-end, and must both contain an estimate of the total taxable income earned or to be earned for the full year.

2. PAYE, UIF & SDL

Private companies are required to register for employee tax with SARS. This includes the Unemployment Insurance Fund (UIF), Pay-as-you-earn (PAYE) and Skills Development Levy (SDL). UIF gives short-term relief to workers when they become unemployed or are unable to work because of maternity, adoption parental leave, or illness. It also provides relief to the dependents of a deceased contributor. The SDL is a levy imposed to encourage learning and development in South Africa and is determined by an employer’s salary bill. The funds are to be used to develop and improve the skills of employees. PAYE stands for Pay-As-You-Earn and the process involves withholding tax on taxable incomes of employees.

3. VAT

Businesses with a turnover exceeding R 1 million in any consecutive twelve-month period must register for VAT​. Businesses with a turnover exceeding R 50 000, in the past twelve-month period, may choose to register voluntarily. If your small business is required to or has chosen to register for VAT, you need to submit VAT returns and payments every four months. These returns are due on the last days of June, October, and February.

When your small business is registered as a VAT vendor, you need to charge VAT on all of the goods and services you sell to your customers. Although, certain goods are zero-rated, or exempt from VAT. The VAT charge, or output tax, is 15% of your goods and services sale price.

Read: Small Business VAT Registration 

4. Dividends Tax

Companies that declare and pay a dividend need to register for Dividends Withholding Tax so that they can file a Dividend Return and pay this tax to SARS. This can be done on SARS eFiling. The SA Tax Guide states that dividends tax is a withholding tax that is deducted from dividend payments and paid over to SARS by the company paying the dividend, rather than by the beneficial owner (the recipient).

5. Customs Duty

According to Tax Tim, any company that imports goods to South Africa, or exports goods from South Africa, is required to be registered with SARS for Customs Duty.