A company is a distinct legal entity separate from its shareholders or officers. It can enter into contracts and sue other entities. Other entities can also sue it.
The most common types of company are:
- ‘proprietary limited’ companies (Pty Ltd) – a private (not public) company that does not sell its shares to the general public and can have a maximum of 50 shareholders; and
- ‘public’ companies – which are usually formed to raise or borrow public money by listing the company’s shares for trading on a stock exchange.
The two main participants in a company are:
- the shareholders – the owners of the business and the ones who put the capital into the business.; and
- the directors – the persons who manage the business on a day to day basis.
There is a limit to shareholders’ legal responsibility for company debts. This is the amount that shareholders have not paid for their shares (limited liability). However, as most shareholders usually pay for their shares fully when they acquire them, this liability is often zero.
A company is liable for its own debts. Accordingly, if another party makes a successful claim against the company, the claim can be only paid from the company’s assets (and not the assets of directors or shareholders).
However, if directors breach their duties or provide a personal guarantee to a contract, their personal assets will be at risk of exposure.
Companies are taxed at the flat rate 27.5% (or 30% for large companies), regardless of its profits.
Companies can also offset tax losses from one business against profits made by another and may be able to carry tax losses forward into future more profitable years.
Carrying out a business as a company may help avoid conflict between business owners as the number of shares a shareholder owns determines their percentage ownership of the company.
It is essential to have a shareholders agreement in place to govern the shareholders’ relationships. Such a document is typically created when the company is registered. This document provides significant protection against company disputes, particularly when one shareholder departs the company. Likewise, it regulates the rights and responsibilities of shareholders and important business activities, such as how the company will issue shares, pay dividends and resolve conflicts.
As a company will exist indefinitely until it is wound up. If a shareholder or director dies, shareholders can take steps to replace them, and the business can continue to operate.
To establish a company is a relatively high expense (the government registration fee is approx $500), and must submit yearly reports (an annual reporting fee is approx $300).
In addition, there are ongoing accounting costs to maintain proper accounts.
Companies must comply with ongoing reporting obligations including:
- maintaining up-to-date financial records;
- ensuring good governance (e.g. ensuring proper decision making);
- notifying ASIC of certain company changes; and
- paying ASIC’s fees.
Directors must fully understand their responsibilities because if they breach them, they may have to pay certain company debts personally or they may be prohibited from managing another company. A director who breaches their duties may need to pay a fine or find themselves criminally liable and face jail time.
The key directors’ duties are to:
- prevent the company from trading while insolvent;
- ensure the company complies with all legal obligations;
- act in good faith in the best interests of the company and avoid conflicts with personal interests;
- be careful and diligent when running the company; and
- report on the company’s affairs to the liquidator and give them all relevant books and records if the company in the event of a wind-up.