Forms Of Ownership- Private Company 01-07
Also read the chapter on forms of ownership on the study guide on the D6, pages 88-98
Companies
Private Company
A private company is a voluntary association of 1 or more persons, governed by the company Act 71 of 2008, incorporated in terms of the Memorandum of Incorporation and its name ending with the word “Proprietary Limited (Pty Ltd)”. It is a company with legal personalities and is prohibited by MOI from offering its shares to the public, i.e. the transferability of its shares is restricted.
Characteristics of a private company
1. 1 or more persons (including juristic persons) may incorporate a private company.
2. The board of a private company must comprise at least one director (1 or more directors) or any other minimum number as stipulated in its MOI. Each incorporator is a first director of the company.
3. Private companies are subject to fewer disclosure and transparency requirements and not all private companies are obliged to comply with the additional transparency and accountability requirements.
4. Private companies are not obliged to establish committees of the board, but it is recommended in order to provide greater accountability and transparency within the company.
5. A private company is prohibited by MOI from offering its shares to the public and the transferability of its shares is restricted.
6. The name of a private company must end with the expression “Proprietary Limited” or its abbreviation “(Pty) Ltd.”.
7. The company has unlimited number of shareholders and its life span is perpetual or it has continual life span.
8. A private company has a separate legal personality. Shareholders have limited liability
9. Where there are more than two shareholders (except in the case of a one-person company), the shareholder quorum at general meetings is three shareholders with voting rights, unless the MOI provide otherwise.
10. The person quorum for all meetings is the presence at the meeting of the holders of at least 25% of all the voting rights that are entitled to be exercised. The MOI may lower or higher the percentage required, i.e. the MOI may lower or higher the percentage.
11. The Act imposes personal liability on directors who are knowingly part of the carrying on of the business in a reckless or fraudulent manner.
12. Private company is required to give 10 business days’ notice for shareholder meetings.
13. Private company must prepare annual financial statements, but is not required to lodge its annual financial statements with the Commission.
14. Annual financial statements need not be either audited or independently reviewed, unless prescribed by regulation / voluntary audit / independently review except exempted by regulation if one person or every holder holds a beneficial interest.
15. Shareholders of a private company have a right of pre-emption in respect of the issue of new securities unless the MOI excludes this.
16. Information in the private company is available to shareholders.
17. Each share has one general voting right unless the class of shares; preferences, rights and limitations in MOI provides otherwise.
18. All distributions to shareholders require board approval and need to satisfy the solvency and liquidity tests. Distributions are extremely widely defined and include dividends and share buy-backs. Payments will be according to the class, preferences, rights and limitations of shares held.
19. The new takeover regulations will only apply to certain private companies, (MOI provides for its application or if 10% or more of the shares of such private company have been transferred within the previous 24 months).
20. Private company is required to give 10 business days’ notice for shareholder meetings.
Advantages of a Private Company
1. The board of a private company must comprise at least one director (1 or more directors) or any other minimum number as stipulated in its MOI. Each incorporator is a first director of the company.
2. The company has unlimited number of shareholders and its life span is perpetual (has continuity if any member of the company dies/resigns/retires)
3. The company is a separate legal person it can buy property in its own name. Liabilities of the shareholders are limited.
4. The Act imposes personal liability on directors who are knowingly part of the carrying on of the business in a reckless or fraudulent manner.
5. Directors are not compelled to attend the Annual General Meeting (AGM)
6. Audited or independent reviewed of financial statements are optional.
7. Private company is not required to lodge its annual financial statements with the Commission.
8. Information in a private company is only available to shareholders.
9. Shareholders of a private company have a right of pre-emption in respect of the issue of new securities unless the MOI provides otherwise.
Disadvantages of a Private Company
1. A private company is subjected to many legal requirements
2. Difficult and expensive to establish a private company compared to Close Corporations and Sole Proprietorship
3. A private company is prohibited by MOI from offering its shares to the public, i.e. the transferability of its shares is restricted.
4. The company is subjected to double taxation, i.e. on the taxable income and Standard Tax on Companies (STC) payable on declared dividends
5. A meeting may not begin or a matter may not be debated unless at least three shareholders are present.
6. The meeting may not begin to be considered unless sufficient persons are present at the meeting to exercise in aggregate at least 25% of all the voting rights. The voting rights must be determined by MOI.
7. Private companies are compelled to prepare annual financial statements.
8. All distributions to shareholders require board approval and need to satisfy the solvency and liquidity tests and the payment are also extremely widely defined.
Lesson Files
Lesson Questions
Question 1: True/false
Indicate whether the following statements are TRUE or FALSE. Choose the answer and write
only 'true' or 'false' next to the question number.
2.1 Partners share in all profits and suffer all losses. (2)
2.2 In a non-profit company, the profit may not be distributed to staff members or
owners. (2)
2.3 A CK7 is used to make changes on the founding statement of a CC. (2)
2.4 A personal liability company needs a minimum of three directors. (2)
2.5 A non-profit company must appoint official auditors. (2)
2.6 A public company must appoint an audit committee and social and ethics
committees. (2)
2.7 In a personal liability company, the directors are liable for the debt of the business,
even after they have retired. (2)
2.8 An advantage of a sole proprietor is that the owner has limited liability. (2)
2.9 Banks may require a CC to have financial audits for loans. (2)
2.10 The name of a public company ends with (Pty) Ltd. (2)
Question 2: Match terms
3.1 A compulsory meeting for a public company held once a year
3.2 A person authorised to examine and verify accounts
3.3 A company controlled by the government
3.4 A form of ownership where, when the business ceases to operate, its assets need to be transferred to a business with a similar purpose
3.5 A form of ownership where a founding statement forms part of the formation procedure
3.6 A form of ownership that my register on the JSE to attract investors
3.7 A form by which a founding statement may be amended
3.8 A form of ownership where directors are liable for losses suffered by the organisation
3.9 A form of ownership enabling members to control and stabilise prices of produce
3.10 A document needed in the registration procedure of companies
a. non-profit organisation
b. public company
c. CK2
d. annual general meeting
e. CK7
f. state-owned company (SOC)
g. close corporation
h. auditor
i. memorandum of incorporation
j. personal liability company
k. cooperative