INTRODUCTION TO

COMPANIES

UNIT 4
DEFINITION AND CHARACTERISTICS
OF A COMPANY

 A company may be described as an association of persons working

together with a view to making a profit.
 A company is a legal entity incorporated in terms of legislation and is
independent of its owners, who are called shareholders, being a legal
entity; a company has continuous existence which is separate from
that of its shareholders.
 The legal status of a company means that by law it has the same legal
status as that of a natural person with contractual capacity.
 The company can have rights and obligations in its own name, it can
enter into contracts with other persons (natural or legal) and it can be
sued or sue other persons.
 As a separate legal entity, the company is a taxpayer and pays tax at
the prescribed rate of companies.
FEATURES OF A COMPANY
 Number of people: 1 to unlimited, but in practice it is
determined by the number of shares issued. The
minimum number of members is dependent upon the
type of company formed. (1-50 Persons for private
companies and minimum of 7 persons for a public
company)
 OWNERS of companies are referred to as
Shareholders
 Special Act for type of ownership: Companies Act No
71 of 2008; the Companies Amendment Act No.3 of
2011 and Companies Regulations of 2011
FEATURES OF A COMPANY
 Separate legal entity
 Managed by: Board of Directors
 Unlimited lifespan
 Limited liability
 Tax status: taxable entity
 Companies are suitable for Small to very large and international
entities
 Special accounting requirements: Must comply with IFRS or
IFRS for SME’s, and the requirements of the Companies Act,
No. 71 of 2008. The Companies amendment Act No 3 of 2011
and the Companies Regulations of 2011.- In some cases
compliance with IFRS/IFRS for SME’s is not necessary
depending on the public interest score
 TYPES OF COMPANIES
Two types of companies may be formed
and incorporated under the Companies
Act, namely;-
Profit companies; and
Non-profit companies
TYPES OF COMPANIES
Profit companies
Profit companies are those companies incorporated for the financial
gain of their shareholders. Profit companies can take on any of the four
following forms:
 State-owned companies
The name of state-owned companies must end with the expression
“SOE Ltd”.
 A private company and reflected as “Proprietary Limited” PTY(LTD)
 A personal liability company and reflected as “Incorporated: or
“INC”
 A public company as reflected to be “Limited” or LTD
TYPES OF COMPANIES

 Private companies
A company is a private company if it is not state-owned and
its Memorandum of Incorporation prohibits it from offering
any of its securities to the public and restricts the
transferability of its securities.
The name of a private company must end with the
expression “Proprietary Limited” or its abbreviation “(Pty)
Ltd”.
The board of a private company must comprise of at least
one director. Each incorporator is a first director of the
company.
 TYPES OF COMPANIES
 Public companies
A company is a public company if its Memorandum of Incorporation
permits it to offer shares to the general public and which allows the
transferability of those shares.
The name of a public company must end with the word “limited” or its
abbreviation “Ltd”. The incorporators of a public company must at least be
one person and this person can, according to Section 1, also be juristic
person.
This type of company must at least have three directors. A public company
can also be listed on the JSE Securities Exchange (Abbreviated as JSE)
where trading of shares and other security commodities normally takes
place.
A public company that trades its shares on the JSE is also referred to as a
“listed company”.
 TYPES OF COMPANIES
Non-profit companies
 A non-profit company is a company that is usually
incorporated for public benefit. Its income and
property are not distributable to its incorporators,
members, officers or persons related to any of them.
The name of a non-profit Company must end with
the expression “NPC”
 PROCEDURE TO REGISTER A
COMPANY
• Registration is done with the Ministry of Industrialisation, Trade and
SME Development
• Procedure to Register Private (Proprietary) Limited and Public
(Limited) Companies

Step 1: Submission of a name application/reservation form CM5
If approved you may continue with step 2

Step 2: Application for Certificate of Incorporation and Certificate to
Commence Business
PROCEDURE TO REGISTER A
COMPANY
 Step 2: Application for Certificate of Incorporation and Certificate to
Commence Business

 This requires the submission of the following documents

• Certificate of Incorporation on CM1
• Memorandum and Articles of Association in triplicate on forms CM2, CM44,
CM44C, etc (2x copies certificate by Notary Public)
• Copy of approved name on CM5
• Notice of postal and registered address on CM22
• List of directors, Auditors and Public Officers on CM29
• Appointment of an Auditor on CM31
• Statement by each Director regarding the Adequacy of Capital of company
on CM47
• Application for Certificate to Commence Business on CM46
• Request for Submission of Additional Copies CM51
PROCEDURE TO REGISTER A
COMPANY
 Additional Information
• Public Companies, Private Companies and NGOs requires
Memorandum and Articles of Association the need to be certified by
a Notary Public and must be a member Of the Legal Profession,
therefore applicants applying for any of the above business entitles
are encouraged to use the Services of Legal Practitioners.
• All types of business registration take five working days provided
the applicants have complied with all the requirements.
 THE FORMATION
(INCORPORATION) OF A
COMPANY
The most important aspects set out in the Memorandum of
Incorporation are the following:

 The name of the Company

 Particulars of the securities of the company, for example the classes of
shares and the number of shares that is authorized for issue as well as the
rights, limitations and other terms of those shares
 The rights, duties and responsibilities of the shareholders; and
 Particulars regarding the directors and officers of the company.
SOURCES OF FINANCE FOR
A COMPANY
Like a sole trader, a partnership and a CC, a
company can be financed from two sources-
investors’ funds and borrowed funds.
Cash invested by shareholders in a company
is known as the share capital.
A company may borrow funds by taking out
loans or by issuing debentures.
 SHAREHOLDERS
 In order to raise capital, a company issues shares to investors.
 By purchasing shares, an investor becomes a shareholder or
member of the company and he thus acquires equity in the
company.
 Any person with contractual capacity may become a shareholder
in a company.
 This also includes other legal persons and the implication is that
one company may become a shareholder in another company.
 A partnership may not become a shareholder in a company as
they do not have an independent existence and thus are not legal
entities, but partners may buy shares in their own capacities.
RIGHTS OF SHAREHOLDERS
Changes in shareholders
Right to vote
Right to the distribution of profits
Rights to assets
DIRECTORS
 The management of the company is vested in the board of
directors which is appointed by the shareholders in terms of the
provisions of the Companies Act and the Memorandum of
Incorporation.
 The board of directors is the co-ordinating force and policy maker
of the company and is not usually concerned with the routine
daily activities of the company, but delegates this responsibility to
the top management and their staff.
 SHARE CAPITAL
 A share is an equity instrument, which is any contract that
evidence a residual interest in the assets of an enterprise
after deducting its liabilities
 The capital invested in a company by the shareholders is
known as share capital.
 Once a shareholders has made the investment, a share
certificate indicating the number of shares the shareholders
holds is issued.
 Public Co obtains greater portion of its share capital, by
inviting public to subscribe for shares.
 The document used for this purpose is known as a
prospectus.
 A prospectus is a document that serves to introduce the Co to
the public and should contain info that is of great importance
to the prospective investor
AUTHORISED SHARE CAIPTAL
 The share capital with which a company is incorporated in
accordance with its Memorandum of Incorporation, is known as
authorised share capital
 This is the maximum number of shares that the company may
issue and any change in the amount may be done only by way
of a special resolution as a general meeting of the company
 The registration of the authorised share capital requires no
formal accounting entry, as it has no effect on either assets or
the shareholders’ equity.
 In terms of the Companies act, details should be disclosed in
the notes to the financial statement
ISSUED SHARE CAPITAL
 The number shares actually issued are known as issued
share capital
CLASSES OF SHARES
 Ordinary shares are held by ordinary shareholders who
are in effect the owners of the company.
 Ordinary shareholders are usually the only ones with
voting rights at the annual general meeting of
shareholders and in effect control the company.
 Ordinary shares do not bear fixed dividend and
shareholders are guaranteed neither dividends nor
assets upon dissolution.
 They however profit the most when the company is
successful.
 CLASSES OF SHARES
 Preference shares are held by preference
shareholders.
 Are entitled to a fixed dividend and have a preferential
right to dividends and repayment of capital in case of
liquidation
 This class of shares bears a fixed dividend percentage,
i.e. a fixed regular amount (dividend) will be paid to
preference shareholders on their investment. E.g. 6%
Preference shares
 However, preference shareholders are entitled to their
dividend only when profit is available for distribution and
the dividend has been declared in the manner
determined by the Memorandum of incorporation.
TYPES OF SHARES
 Par value shares are those shares stated in the constitution
of the company to be of a specified nominal value per share.
 Par value shares may be issued at a premium but never,
except in terms of section 81 of the Companies Act, at a
discount.
 A premium is an excess issue price over the par value of the
share.
 No-par value shares do not have a specified nominal value
per share. They may be issued at any price considered
appropriate by directors at the date of issue.
TYPES OF PREFERENCE SHARES
 Ordinary preference shares: this class of preference share confers the same rights
as those held by ordinary shareholders, except that their dividends are fixed. If the
company decides not to declare a dividend in any year, these shareholders will forfeit
any income earned on their shares in that year.

 Cumulative preference shares: this class of preference shares is entitled to a fixed

dividend, which accrues if not declared and paid in a specific financial year, thus
resulting in a contingent liability against company in the form of arrear preference
dividends. If the Memorandum of Incorporation does not mention whether the shares
are cumulative or not; it is legally assumed that the shares are cumulative.

 Participating preference shares: These preference shares receive the normal fixed
dividend percentage and then participate further with ordinary shareholders in a share
of profits according to the terms of their issue. A detailed discussion on participating
preference shares falls outside the scope of this chapter.

 Redeemable preference shares: The capital invested in redeemable preference

shares is for a limited period and this period is decided on when the shares are
issued. This means that the company has to repay the holders of redeemable
preference shares the capital they have invested within this predetermined period
THE ISSUE OF SHARES
 A company may issue its shares directly to
investors, or use an investment institution that
specializes in the marketing of shares.
 Direct issue take place with private companies-
may not issue to the public
 When issuing to the public, the company must
issue a prospectus that contains certain
prescribed and other info about the Co.
 An application form will be included with the
prospectus.
THE ISSUE OF SHARES

There are three basic transactions which must be

recorded when shares are issued:
 Recording of the receipt of applications to subscribe
for shares – remember that the applicants must
submit full payment together with their application
forms;
 Allotting shares to successful applicants; and
 Returning the money of unsuccessful applicants.
UNDERWRITING OF SHARES
 When a public company engages in a share issue, there is always the risk
that the company may receive fewer applications than the number of
shares being issued.
 In order to prevent the risk of under-subscription, a company can decide to
use under-writers.
 Under-writers provide a guarantee to a company that the share issue will
be fully subscribed.
 If the share issue is indeed under-subscribed by the general public, the
underwriters take up the shares not subscribed for by the public at the
share issues price or price stipulated in the agreement with the company.
 Underwriters are paid a commission by the company for this service.
 The commission is usually calculate on the total value of the shares they
underwrite.
 If there is an over-subscription of shares, the company must still pay the
underwriters their commission.
 DIVIDENDS
 A dividend is a return on the shareholders original
investment and is a distribution of profits of the
company to shareholders in the ratio in which shares
are held.
 A dividend can only be paid from profits that are
available for distribution.
 The profit made during previous trading periods and
credited to retained earnings may be added to the profit
of the current year to arrive at a sum on which the
dividends can be based.
PREFERENCE DIVIDENDS
 Preference shareholders have a preferential right to dividends.
 This means that before an ordinary dividend can be declared,
preference shareholders have to receive their dividend first.
 The dividend represents a fixed percentage of the nominal value of
preference share capital.
 If no distributable reserves are available in the particular year to
declare a dividend, both ordinary and preference shareholders
forego their right to dividends, unless the preference shares are
cumulative.
ORDINARY DIVIDENDS
 When calculating an ordinary dividend, it makes no difference how
long the holder of a share certificate has held the shares.
 As soon as a dividend is declared to all registered shareholders, an
ordinary shareholder is entitled to the full ordinary dividend, even if he
or she only became a registered shareholder the previous day. The
calculation of dividends on ordinary shares differs from the calculation
of preference dividends.
 The preference dividend is quoted as a fixed percentage, while
ordinary dividend is quoted as cents per share (number of ordinary
shares issued x dividend per share).
 For example, if an ordinary shareholder holds 200 shares of N$ 1
each and acquired these shares six months before closing of the
share register, the dividend the shareholder will receive , should the
company declare a dividend of 20 cents per ordinary share, amounts
to N$40 (200 x 20 cents)
 INTERIM, FINAL AND ANNUAL DIVIDENDS

 An interim dividend is one which is declared halfway

through the year, usually when a company discloses its
interim results, from either profit carried over from
previous year (retained earnings), or profit which
accumulated during the current period.
 A final dividend is declared at the end of the financial year
from available profit. If the company has declared an
interim dividend, the interim dividend and the final
dividend together form the annual dividend.
 If no interim dividend was declared, the final dividend is
correctly referred to as the “annual dividend”.
DEBENTURES
A debenture is a debt owed by a
company to a debenture holder on the
conditions specified in the debenture
deed.
A debenture is a written
acknowledgement of debt by the
company issuing the debentures.
DEBENTURES
 The debenture deed contains the conditions upon which the
debentures are issued. Items that can be included in the
debenture deed are:
 Whether or not the debentures are secured, and if secured, the
assets encumbered;
 The interest rate payable on the debentures
 The period of the debenture loan
 Repayment conditions;
 The possibility of converting debentures into shares; and
 The rights of the debenture holder should the company default in
keeping the agreement.
DEBENTURES
 Debentures do not form part of the equity of a company and
are classified under non-current or current liabilities,
depending on the repayment period stipulated in the
debenture deed.
 Debenture holders receive a fixed interest irrespective of
whether or not the company is making a profit.
 Interest on debentures may be paid, for example quarterly,
half-yearly or annually. Interest on debentures is a finance
cost and disclosed as such in the statement of profit or loss
and other comprehensive income.
 TYPES OF DEBENTURES
 Different kinds of debentures can be distinguished, depending on the rights
attached to them. The following are a few examples of different types of
debentures:
 Secured debentures: Debentures secured by either movable or
immovable assets. This means that if the company is liquidated, the
debenture holder has the right to claim repayment from the proceeds of the
sale of those assets.
 Unsecured debentures: Debentures not secured by an asset. The
debenture holders have the same rights as any other creditor in the case of
liquidation.
 Redeemable debentures: Debentures may be redeemed prior to the
manufacturing date or at dates specified in the debenture deed.
 Convertible debentures: Debenture holders have the option to convert
their debentures into specific shares, usually ordinary shares, after a
specified period.
RESERVES
 Distributable reserves are retained profits which, at
the discretion of the directors, may be declared as a
dividend to shareholders.
 They are however, retained to finance future growth of
the company.
 All of the distributable reserves of a company are
known as the retained earnings.
 When the directors declare a dividend to
shareholders, a dividends payable account is used to
record the liability to shareholders.
 RESERVES

 Non-distributable reserves is one which is not available to

be declared as a dividend to shareholders.
TAXATION

Owing to its legal status as a separate legal

entity apart from its shareholders, a company
is subject to normal tax at a rate of 32%
ANNUAL FINANCIAL
STATEMENTS OF COMPANIES
 The annual financial statements of a company provide valuable
information not only to the management of the company, but also to
shareholders, investors, creditors, bankers and other interested
parties. For example, to shareholders, these financial statements
project the accountability of the board of directors for the resources
entrusted to them and enable the shareholders to assess the quality
of the management.
 On the grounds of the information in these statements, the
shareholders can decide whether or not to replace or re-appoint the
management and whether or not to retain or sell their investment.
ANNUAL FINANCIAL
STATEMENTS OF COMPANIES
 IAS1.8, stipulates that the financial statements of a company
should consist of:

 A statement of financial position as at the end of the period

 A statement of profit or loss and other comprehensive income
for the period
 A statement of changes in equity for the period
 A statement of cash flows for the period
 Notes to the financial statements