Lecture Slides for Law of Business

Entities (LBUE3704)

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 LECTURER

T: +27 51 401 9111 | E: info@ufs.ac.za | www.ufs.ac.za

DR Shelton T Mota Makore

T: +27 51 401 9111 | E: info@ufs.ac.za | www.ufs.ac.za

UNIT 1: INTRODUCTION TO THE LAW OF
BUSINESS ENTITIES

T: +27 51 401 9111 | E: info@ufs.ac.za | www.ufs.ac.za

 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

THE END