Definitional elements • The Law of Business Entities as a module is also referred to in other countries, spaces and jurisdictions as Corporate Law; Mercantile Law; Company Law; and Law of Corporate entities; Law of Companies and other Business Structures. • This invokes the question what is the law of business entities ? Definitional elements • It is a body of legal rules and principles which inter alia, governs various business entities such as: sole proprietorship Partnerships Close corporations Business trusts Stokvels The Significance of the Law of Business Entities • The Law of Business Entities has a significant impact on the economy in general and on commercial entities in particular. • Farouk HI Cassim et al summarises the significance of the law of business entities in “Contemporary Company Law” pg 3 as: The Significance of the Law of Business Entities • It can promotes, facilitates commercial enterprise, and economic growth or hinger or retard it. • It plays a vital role in wealth creation and social renewal. • Good corporate law system lies at the very foundation of a prosperous economy. The Significance of the Law of Business Entities • When the law of business entities is clear, certain and accessible it creates a conducive environment for attracting global capital and investments. • It outlines the substantive rights and duties or obligations of people who participates in commercial activities and other stakeholders. The development and evolution of the law of business entities in south Africa • Therefore, the regime of the law of business entities should not be bulky, complex and full of conflict in its underlying philosophy and policy. • The development and evolution of the law of business entities in South African can be understood through three historical phases or epochs. The development and evolution of the law of business entities in south Africa • Semantically, the three phases can be understood as following, Precolonial era/Industrialisation period, Colonial era/Mercantilist period), Post-colonial era/ Constitutional dispensation). Historical evolution • In the pre-colonial era, there is evidence of the presence of rudimentary and primordial business structures created by traditional communities headed by traditional leaders revolving around the economic arteries of barter trading in manufactured good such as textile, mining commodities etc. Historical evolution • Nonetheless, most of the merchants in this era heavily depended on the importation of foreign manufacture goods from China, Portugal etc. • These rudimentary business structures and commercial activities were governed by customary law rules passed down orally from one generation to another ie. principles governing contractual agreements, ubuntu Historical evolution • However, before the Industrial Revolution, companies were a relatively rare business form. • Until 1844, there was no comprehensive legislation governing business structures, so they had to be incorporated by a specific Act of Parliament, or by the granting of a royal charter in Europe. Historical evolution • The British East India Company in 1600 and the Dutch East India Company in 1602 had to be incorporated by a specific Act of Parliament, or granting of a royal charter . • This was the procedure to be followed by people who wished to form business entities Colonial era • The law of business entities began to take a more concrete in 1861 with the enactment of the Joint Stock Companies Limited Liabilities Act No 23 of 1861 of the Cape Colony. • Together with other provincial company legislation, it was a carbon copy of equivalent English legislation. Colonial era • The first national law governing business entities was introduced in 1926 with the Union Companies Act, which was amended from time to time along the lines of the latest English legislation. • The 1926 Act was replaced in 1973 with the Companies Act No 61 of 1973, which, despite The colonial era efforts to innovate and develop a direction more appropriate for South Africa, remained much in the mould of English law. • In 1976, the Law of Business entities in South Africa mirrored the company law foundation which were put in place by the British in the middle of the 19th century. Colonial era • Perhaps the most significant departure from the UK law occurred in 1984 with the adoption of the Close Corporations Act, No 69 of 1984. • The new law was inspired by a UK policy document recommending the introduction of a new form of incorporation for small companies, which was never implemented in the UK Post-colonial era/Constitutional dispensation • Since the Companies Act was enacted in 1973, fundamental legal developments have taken place in South Africa. • The most important change was the adoption of the Constitution in 1996. • No area of South African law can be analysed without recourse to the Constitution Constitutional Dispensation which is the supreme law of the country. • The Bill of Rights, as provided for in Chapter 2 of the Constitution, constitutes a cornerstone of democracy in South Africa. • It enshrines the rights of all people in the country and affirms the democratic values of human dignity, equality and freedom. Constitutional Dispensation • It also regulates the relationship between economic citizens and thus may have fundamental implications for the Law of Business entities. • In terms of section 22 of the Constitution 1996, Every citizen has the right to choose their trade, occupation or profession freely. Constitutional Dispensation • Nonetheless, the practice of a trade, occupation or profession may be regulated by law ie Companies Act 71 of 2008, Legal Practice Act 28 of 2014, Insolvency Act 24 of 1936, Income Tax Act of 1962, Tax Administration Act 28 of 2011, The Auditing Profession Act 2005 Constitutional Dispensation
• The right to occupation, trade and profession
encapsulated in section 22 of the Constitution is not an absolute right. • It can be limited in two ways. (1) In terms of the internal limitation through the regulation of the Law eg Legal Practice Act Constitutional Dispensation
• It can be limited through the general
limitation clause section 36 of the Constitution. • Although section 22 provides for the right to occupation, trade and profession, in a commercial dispute, this section is hardly Constitutional Dispensation
• Invoked because of the principle of
subsidiary which provides that “where it is possible to decide any case, civil or criminal, without reaching a constitutional issue, that is the course which should be followed” See S v Mhlungu and Others • Constitutional Court 25/94; 1995 (3) SA 867 (CC).
• This means recourse will be based on
Companies Act 71 of 2008 and other applicable legislation. Constitutional Dispensation
• The adoption of the Companies Act 71 of
2008 which was signed into law on 8 April 2009 was necessitated by the need to modernise the Law of Business Entities in South Africa in sync with the constitutional dispensation and the changing global envir Constitutional Dispensation
• The adoption of the Companies Act 71 of
2008 which was signed into law on 8 April 2009 was necessitated by the need to modernise the Law of Business Entities in South Africa in sync with the constitutional dispensation and the changing global envir New Constitutional dispensation • During the existence of the 1973 Act, both the domestic and global environment had changed dramatically, • Many of the traditional law of business entities principles, doctrines and policies inherited from 19th century England had been abandoned, or substantially modified. Constitutional Dispensation • New corporate concepts had been developed and higher standards of corporate governance, new standards of accountability, disclosure and transparency had been developed. See Cassim etc (Contemporary Company Law) pg 3. • Legislation had outlived its usefulness, and stifling the development of the economy. Sources of the Law of Business Entities in South Africa • WHAT ARE THE SOURCES OF THE LAW OF BUSINESS ENTITIES IN SOUTH AFRICA? Sources of the Law of Business Entities (1) The Constitution of South Africa, 1996. • See section 2, and section 8 of the Constitution. (2) Legislation and Soft Law King IV Code • The Companies Act 71 of 2008, Close Corporations Act 71 of 1984, Insolvency Act 24 of 1936, Consumer Protection Act 68 of 2008, The Competition Act 89 of 1998 etc. Sources of the Law of Business Entities • Common law, Roman Dutch and English Common law heritage. • Section 39 (1) of the Constitution provides, “when interpreting the Bill of Rights, a court, tribunal or forum must promote the values that underlie open and democratic society (must consider international law and may consider foreign law (eg Canadian Law). Sources of the Law of Business Entities
• Case Law or previous judicial decisions.
• The writings of corporate law experts and publicists. • Customary law to some degree ie the principles of ubuntu in corporate governance framework /King IV Code DISSECTING SOME IMPORTANT CONCEPTS USED IN LAW OF BUSINESS • The foundationENTITIES of company law or Law of Business Entities rest on the concept that a company has a separate legal personality. • Note that not all business entities enjoy this legal status of being a separate legal personality. Dissecting important concepts • Several consequences flow from this concept of separate legal personality such as privilege of limited liability. • The property, profits, debts and liabilities of the company belongs to the company. • The company may sue and be sued in its own name. Dissecting important legal concepts • But the courts and legislature have recognised that the separate legal personality of a company has been often abused which has led to exceptions to this sacrosanct principles to curb extreme cases of abuse in the form of piercing the corporate veil. • NB will explore this principle later in the second semester as time progresses. See Salomon v Salomon UKHL 1, [1897] AC 22 CHOICE OF BUSINESS STRCTURES • As stated earlier in this lecture there are many business structures recognised by the Law in South Africa. • Sole proprietorship, Partnerships, Close corporations, Business trusts, Stokvels • Whether an individual or people should chose to form either of the business structure depends on many issues such as Choice of Business Structure • The purpose of the business. • Duration eg operation for limited period or indefinitely. • Cost and Method of formation. There are simple and complex procedures. • Availability of capital and sources of capital Choice of Business Structures • Types of assets acquired. • Power of control to be vested in people who own or control the business. • Selection of staff, voting powers of owners, participation in profits and losses, taxation advantages and disadvantages, foreign or local establishment, Choice of Business Structures
• Agency arrangements and liability, transferability
of business interests, legal standing of business. • See Shawn Kopel “Guide to business Law” pg 25. Sole proprietorship • Commonly known as sole traders. • It is the most common and simplest form of business in South Africa and world. • It is conducted by an individual owner known as a sole proprietor or sole trade. • Sole proprietor conducts business under their own name by simply doing business or operate under a trade name. Sole proprietorship • There are no requirements for the registration of a sole proprietorship. • However, there are certain industries and professions that may require the owner of the business to acquire a license. • For instance, for a lawyer to operate a firm, he or she must be admitted. A tavern requires a liquor Sole proprietorship Licence. • The owner of the business is also the manager of the business. • It is therefore the responsibility of the owner to ensure that the business has procured the necessary license, keep the books of accounting, employ supporting staff, file tax Sole proprietorship Returns with SARS. • A sole proprietorship is not a legal person • The debts and liabilities of the business are the debts and liabilities of the owner. • This also means that the profits of the business belong to the owner Sole proprietorship • Sole proprietor may have employees and is permitted to carry own most types of business. • It is simple to start and does not have the operating expenses of other entities. • In deciding whether to give a loan to a sole proprietor the bank will look at the sole proprietor’s credit history and networth. Sole proprietorship • Sole proprietorship has only one owner and cannot sell shares or interest in the business. • Sole proprietorship is a financial risk because he or she is personality liable for all obligations of the business (unlimited liability) including debts and negligent or willful acts of employees and agents. Sole proprietorship • If the sole proprietor has insufficient insurance to cover the damages, their assets could be sold. • If the business is is unsuccessful and is terminated, the sole proprietor will be personality liable for all debts, unpaid bills to vendors and service providers. Sole proprietorship • If the personal assets of a sole proprietor do not satisfy the outstanding business debts, the sole proprietor maybe forced into insolvency. • Study the case of J C Van Der Merwe v Anastaci P (A668/07) [2012] ZAGPPHC 288. Sole proprietorship • the High Court held that it was the responsibility of the appellant (trader) to inform other parties to the contract that he was trading as a sole proprietorship. • This case shows that although a sole proprietorship is not a legal person it is permitted to adopt a trade name. Sole proprietorship
• However, the owner should take
reasonable steps to inform the public that he is operating as a sole proprietorship. Sole Proprietorship and Tax obligations
• Assuming the sole proprietor is already registered
with SARS personally, then by default the proprietorship will also be registered. • There is no need for a sole proprietor to register the business with SARS as the sole proprietorship itself is not separately taxed on its income. Sole Proprietorship and Tax obligations • All of the income and expenses get added to the sole proprietor's own personal annual income tax return to be taxed together with any other income he or she may have earned eg salary. Sole Proprietorship and Tax obligations
• The sole proprietor should file an ITR12
form (the annual tax return for individuals). • A sole trade must register as a VAT vendor if he or she expects a turnover to exceed 1 million in a 12 month period. Sole Proprietorship and Tax obligations • As soon as the turn over hits 1 million the sole trade is required by the law to become a VAT Vendor. • VAT is an abbreviation for Value Added Tax. It is an indirect tax on consumption of goods and services in the economy. Sole Proprietorship and Tax obligations • A sole proprietor may face a penalty of up to 20% of the underestimated amount when: (a) The total of the first and second provisional payments is less thank 90% of the assessed income tax as a person earning more than R1 million. (b) The total of the first an second provisional payments is less than 80% of the assessed tax as a person earning more thank R1 million. Sole Proprietorship and Tax obligations • NB, If the trade is a salaried employee and is earning money from a side business as sole proprietor, he must register for provisional tax. • Provisional tax is not a separate tax from income tax. Sole Proprietorship and Tax obligations • Provisional tax is a method of paying income tax liability in advance to ensure that the tax payer does not have a large tax debit on the assessment. • It allows the tax liability to be spread over the relevant year of assessment. Sole Proprietorship and Tax obligations • In XYZ CC v Commissioner of South Africa Revenue Service (IT14157) [2019) ZATC 6, the Tax court was called upon to decide whether a sole proprietor was an employee or an independent contractor for purpose of taxation. Sole Proprietorship and Tax obligations • The facts of the case are as following, The South African Revenue Service (SARS) selected XYZ CC for an audit over its tax affairs. The focus of the audit was to verify whether the Pay as you Earn (PAYE) and the Skills Development Leavy (SDL) were deducted from employees and paid to SARS. Sole Proprietorship and Tax obligations • The audit report showed that the appellant employed two sole traders namely IOP and VWX Construction. Based on the contract of employment and IPS issued submitted by the appellant. This means that the payments received by the sole proprietorship were “remunerations” subject to taxation as contemplated by section 1. Sole Proprietorship and Tax obligations • The appellants contended that payments made to IOP and VWY were not remuneration but payments. In other words, VWY was a separate legal entity. At the same time the owner of VWY was an employee of the appellant and also of VWY. The court held that there was no evidence to support the view that VWY was an independent contractor. Sole Proprietorship and Tax obligations • The court did not comment on the appellant ‘s submissions on the sole proprietorship as a legal entity. The appellant was required to show that VWY had more than three employees, received other contracts of service from other clients and that VWY had an established place of business other than the appellant’s premise. Sole Proprietorship and Tax obligations • If the appellant had shown that VWY was a sole proprietor acting as a subcontractor employee tax obligations would not apply to VWY. • A sole proprietor must keep a ledge which records business expenses and personal expenses as separate accounts for tax purposes. Sole Proprietorship and Tax obligations • The general rule is that income generated for purposes of advancing the objectives of the business must be separate from personal expenses. • To prove a tax claim deduction, the trade must provide a receipt or invoice for his business expenses. Sole Proprietorship and Tax obligations • A sole proprietor may claim tax deductions for expenses incurred in generating income for the business. • Business expenses are, stationary, office rental, inventory. • Personal expenses are family accommodation, vehicles, medical insurance Sole Proprietorship