The initial step in setting up a business is to select the most appropriate legal framework. Various factors will tend to dictate what form of business enterprise is adopted and the options available are mainly a partnership, a close corporation, a company or a business trust. Deciding the best legal structure is a complex matter and professional advice should be obtained.
The three most popular and frequently used business entities are the close corporation, the company and the business trust. The formalities required to run a company make it the most expensive form of business enterprise to operate, while the close corporation with fewer formalities, costs less to run. However, the business trust and partnership are freer from regulation.
Public and private companies are obliged to keep books of account; produce financial statements; have their financial statements audited annually; keep various registers; and, regularly render certain returns to the Registrar of Companies. A company may not start operating before a certificate to commence business has been issued by the registrar and is subject to various formal controls such as the need to hold an annual general meeting and a minimum notice period for the calling of share holders' meetings.
In the case of close corporations or CC's, the obligation to keep books of accounts and to produce financial statements is also imposed, but less rigorously and in less detail. The requirements that the financial statements of a CC be audited on an annual basis are replaced by the requirement that financial statements be checked by an accounting officer whose duties are less onerous than those of the auditor of a company. The necessary registers and returns are minimal and there is no equivalent of the certificate to commence business issued to a company. Only reasonable notice to members is required for a meeting of the members.
Changes in business trusts
As for the business trust, in the past a trust or its trustee in his capacity as trustee of the trust, was not allowed to be a member of a close corporation. However, this changed during 2006 so that a trustee of a trust is now allowed to be a member of a close corporation. It is therefore now possible for a trustee of a family trust to be a member of a close corporation therein representing the family trust. The assets of a trust are owned by the trustees. There has been a divergence of views as to whether the trust assets fall into a trustee's private insolvent estate when he becomes insolvent in his private capacity, but the better view seems to be that trust assets do not, on insolvency of the trustee, form part of his personal estate.
Enter into an agreement
To create a business trust, you will have to enter into an agreement in terms of which the founder undertakes to transfer assets to the trustee, who in turn agrees to administer them for the benefit of the trust beneficiaries. Although it is not a requirement that the books and financial statements of a trust should be audited annually, the Master of the Supreme Court may request same from the trustees.
Somerset West attorney Hanlie Visser can be contacted by sending mail to PO Box 1594, Somerset West or by phone on (021) 852-7915. This column is published for information only. No responsibility can be accepted. Back issues of this column are available on www.hanlievisserinc.co.za.
