Choice of company structures

Investors can employ a variety of legal business structures in South Africa, depending on the nature of the operation and the related tax and legal considerations. The most commonly adopted forms of doing business by foreign investors are private companies and branches.

Company structures
Companies may be either private or public. (Image: Brand South Africa)

South Africa has a well-developed and formally regulated company law regime. All South African businesses are governed by the Companies Act No 71 of 2008. It is administered by the Companies and Intellectual Properties Commission.

The new Companies Act, which was promulgated in 2009 and has been effective since May 2011, rewrites South African law completely. The new Act aims to modernise the law, align it with international best practice, and make it more business friendly –  especially by streamlining it with other South African legislation, such as the Promotion of Access to Information Act.

By making it simpler and less prescriptive, the new Act encourages entrepreneurship as well as economic and employment growth. It is more flexible (companies are allowed to change certain requirements according to their own circumstances, for example); and adaptable (smaller companies have less arduous responsibilities than large public companies when it comes to corporate governance and financial reporting).

South African law used to provide for a business entity type called Close Corporations (CCs) until the Companies Act 71 of 2008 came into force on 1 May 2011. While CCs may no longer be created, existing CCs will continue to operate until they are converted into companies

Note: Foreigners who are contemplating investing in the South African economy by establishing a business or by investing in an existing business in the country must apply for a business permit. As an applicant, you will be required to invest a prescribed financial capital contribution.

The Companies Act regulates the formation, conduct of affairs, and liquidation of all companies and it makes no distinction between locally owned or foreign-owned companies. Companies may be either private or public.

There is a wealth of world-class expertise that will guide an investor through the process of registering a business in South Africa. Legal, management, banking and accounting firms are supported by chambers of commerce, embassies and government offices.

  • Website: See www.cipro.gov.za, the website of the Companies and Intellectual Property Commission (CIPC). An agency of the Department of Trade and Industry agency, it focuses on the registration of companies and intellectual property.
  • Download: Companies Act No 71 of 2008 [PDF]

Choice of business entity

There are two broad types of companies included under the Companies Act: non-profit companies and profit companies.

Non-profit companies

A company set up for public benefit, or for a purpose relating to cultural or social activities, or communal or group interests, such as religion, sciences, education, arts, charity or recreation. Under the old Act, these were known as Section 21 companies. Non-profit companies are now dealt with in Section 1 to the Act.

The income and property of a non-profit company are to be applied solely to the promotion of the non-profit company’s main object.

Profit companies

The principal methods of doing business in South Africa are by using a:

  • Public (name ends in “Ltd”) or private (“Pty Ltd”) company
  • Personal Liability Company (“Inc”)
  • Partnership
  • Business trust
  • Sole proprietorship
  • External company (branch of a foreign company)

Tax and other considerations affect the choice of a particular form of business entity. The most commonly adopted forms of doing business by foreign investors are private companies and branches.

Companies operate on the basis of limited liability. As a general rule, members are not liable for the debts of a company; however, there are exceptions to this rule.

Private companies

Most foreign investors set up as a private company, as they require the least amount of annual formalities.

They must have at least one director and shareholder and membership is restricted to 50. The directors do not need not be South African residents or nationals.

Public companies

Public companies are formed to raise funds by offering shares to the public and there is no limit to the number of shareholders.

External companies

Foreign companies that do business or carry out non-profit activities in South Africa are known as external companies.

Such a company should be reasonably seen as intending to engage in business or non- profit activities in South Africa, though activities such as:

  • being party to one or more employment contracts within South Africa; or
  • engaging in a course or pattern of activities within South Africa over a period of at least six months.

Branches of foreign companies are accorded legal status in South Africa by virtue of their registration as external companies but are not recognised as separate legal entities – except for exchange control purposes.

An external company must register with the Companies and Intellectual Properties Commission within 20 business days after it first begins to conduct business, or non- profit activities, in South Africa.

Domesticated companies

A “domesticated company’ is defined as a foreign company whose registration has been transferred to South Africa and which will thereafter exist as a company in terms of the Companies Act as if it had been originally so incorporated and registered.

Source: Department of Trade and Industry’s Investor’s Handbook

Reviewed: 15 March 2013

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