FORMS OF OWNERSHIP

2. THE BENEFITS AND CHALLENGES OF ESTABLISHING A COMPANY VERSUS OTHER FORMS OF OWNERSHIP 

 2.1 Benefits:

• More owners means the possibility of more capital 
• More capital means greater possibility for expansion and growth
• Shareholders appoint a board of directors that gives more effective management
• A separate legal entity AND continuity of existence
• Profit on company tax is paid at a fixed rate.

 2.2 Challenges:

• Expensive and complicated formation procedures
• Many legal requirements to comply with
• If the directors are not competent then the shareholders' investments may be at risk

3. THE FORMATION OF COMPANIES 

 3.1 Registration:

• The Memorandum of Association must be drawn up.  It must be filed together with the Notice of Incorporation with the Companies and Intellectual Property Commission.

The Six Steps in forming a company:

1)      The company name is reserved and the fees are paid to the Registrar of Companies and Intellectual Property Commission.

2)      The certificate to commence business is submitted with the formation documents

3)      The company opens a bank account

4)      The company registers for income tax, VAT and employee withholding tax with the local Receiver of Revenue. 

5)      The company registers for UIF with the Department of Labour

6)      The company registers with the commissioner for the Compensation for occupational Injuries and Diseases Act ( COIDA)

3.2 The company’s charter – the Memorandum and Articles of Association:

 The memorandum of association defines the scope of a company and includes the following:

• Company's name
• Address of the registered office
• Stating of the limited liability of the shareholders
• The amount of share capital
• The purpose of the company

 The articles of association indicate the internal management regulations and include the following:

• Names of the directors and their roles
• The way in which profits will be distributed
• The internal rules for the running of the company
• Meetings
• Voting rights of shareholders

3.3 The Prospectus 

A prospectus is a written invitation, issued to the public offering shares/securities in exchange for money.    

    A prospectus must convince the public that they should buy shares in the company. It states:

• The purpose of the offer
• The share capital
• The shares issued
• Property owned
• Preliminary expenses
• Amounts due to the promoters
• Particulars of shares
• The minimum subscription
• Name of the company – incorporation and commencement of the company 

 Members of the public have 60 days to reply to the invitation.

The minimum subscription: before a public company may commence the company must prove that enough shares have been issued to cover the costs of launching the company and any other initial expenses that may be incurred. This is called the minimum subscription and they must be sold within 60 days of issuing the prospectus otherwise the public company may not commence business.

3.4 Underwriting

To ensure that the minimum subscription is met, a bank or other financial institution may guarantee to buy any shares not yet sold in order to make up the minimum capital requirements.

This ensures that –

• The minimum subscription will be sold
• The business can commence as a public company