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The Companies Act: Friend or Foe of Small Business?

The Act is much more comprehensive, which means there is no need to replicate those provisions in the company’s MOI. The MOI can therefore be a simpler document.

Sarah Lawrence

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On 1 May the “new” Companies Act will have been in place for exactly three years. Many entrepreneurs are likely to remember the initial confusion when the Act first took effect, mainly because it did away with the concept of a close corporation.

Small business owners are often caught between the need to house their business operations in a legal entity that affords limited liability and a desire to avoid the legal and administrative difficulties that come with registering and maintaining a legal entity.

Close corporations were perceived as easier to run and administer. Also, they were certainly cheaper to maintain than a company since financial statements did not have to be audited. For this reason most small businesses opted for a close corporation rather than a company before 1 May 2011.

After 1 May 2011, however, it was no longer possible to register a close corporation or convert a company to a close corporation.

While compliance with the Act has been intimidating for small businesses, the provisions of the Act do provide for greater administrative and operational efficiency in the long term. The Act also allows for the increasing complexity of small businesses as they grow.

Three years on the Companies Act has proven to be a friend of small business rather than a foe as initially feared by many entrepreneurs. Business owners still harbouring resentment towards the Act should consider taking advantage of the following five benefits offered by the Act:

1. Less onerous admin and operational requirements

The Act has simplified certain of the administrative rules previously associated with companies. Under the Act, companies may store documents in electronic format, give notice of meetings electronically, and electronic signature of documents is permitted.

These changes suit smaller businesses and start-ups, which tend to be digitally based and seldom deal with documents in hardcopy format.

2. Structured shareholding

The introduction of the Act has made it possible for small businesses to house their operations in a private company structure with all the flexibility around share capital that a company offers, but without the prohibitive expense of auditors’ fees.

This is because, in terms of the Act, a private company is no longer required to have its annual financial statements audited unless it chooses to do so or unless it meets certain criteria relating largely to business size.

The Act therefore offers investors a chance to own equity in a small company, whilst reserving control, at both a shareholder and a board level, for the founding shareholders.

3. Shareholders and directors

The scope afforded by the Act for directors’ powers to be almost as extensive as those of shareholders, whilst shareholders retain final control of the company, align well with how small businesses like to work.

A characteristic of many smaller businesses is that their shareholder numbers are small and there is often a 100% overlap between shareholders and directors. Even where the shareholders are themselves legal entities, the board nominees of those shareholders are generally the principals behind the entities.

The result is that the founders of small businesses find the distinction between shareholders and directors puzzling. Often they do not understand why the directors alone cannot run the company since in their view the directors and the shareholders are the same people.

Depending on the content of the Memorandum of Incorporation (MOI), which is determined by shareholders, the powers of the board of a small company may be extensive, including the power to affect the share structure of the company.

This means the board may have a wide discretion to run the company without constantly reverting to shareholders, which makes particular sense where the board and the shareholders are for all intents and purposes the same people.

4. Protecting shareholder interest

Once a small business reaches a certain level of maturity, or takes on additional shareholders who do not have board representation, it makes sense for the distinction between the board and the shareholders to be more strongly drawn. Shareholders can achieve this by resolving to amend the MOI, thereby circumscribing the board’s powers.

While the board has wide powers in terms of the MOI, the Act reserves certain key powers for the shareholders alone, including the requirement that at least 50% of the board must be elected by the shareholders, and the power to remove directors from the board.

The flexibility that the Act affords around the percentages required for an ordinary and a special resolution means that even where there is only one class of shares in a company, shareholders can arrange the percentages in a manner that they consider appropriate, provided of course that there is always a 10% difference between the percentage of votes required to pass an ordinary resolution and that required to pass a special resolution.

5. Simpler decision making processes

The Act contains more extensive and detailed provisions than the old Act in relation to the manner in which shareholder and directors’ meetings are to be held, and the process by which shareholders and directors make decisions.

Whilst the old Act contained some guidance in this regard, the detail was generally to be found in a company’s articles of association. The Act is much more comprehensive, which means there is no need to replicate those provisions in the company’s MOI. The MOI can therefore be a simpler document.

Sarah Lawrence is a commercial legal consultant at Caveat Legal. She holds a BA in English, Sociology and Industrial Psychology from the University of Stellenbosch, an Honours degree in English Literature from the University of Cape Town, and a BA LLB from the University of Cape Town. Sarah completed her articles at Edward Nathan Sonnenbergs and was admitted as an attorney of the High Court of South Africa in 2010. She specialises in Corporate Commercial Law, with a focus on transaction work.

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Company Posts

An Introduction To COID Registration And The Letter Of Good Standing

Company Partners is a leading COID Registration Service Provider in South Africa. They also assist Companies to obtain a Letter of Good Standing from COIDA.

Company Partners

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Compensation for Occupational Injuries and Diseases Act

What is COIDA?

The Compensation for Occupational Injuries and Diseases Act (Act 130 of 1993) replaced the “Workmen’s Compensation Act” (Act No. 30 of 1941), and was amended in 1997.

The Compensation Fund provides compensation for occupational injuries or diseases sustained or contracted by employees in the course and scope of their employment, or their dependents for death resulting from such injuries or disease, and to pay reasonable medical expenses incurred.

Who must register with COID?

According to prescription, anyone who employs one or more part- or full time workers must register with the Compensation Fund and pay annual assessment fees. The Compensation Fund is a trust fund that is controlled by the Compensation Commissioner and employer contributes to the Compensation Fund. The Commissioner is appointed to administer the Fund and approve claims lodge by employees or their dependants.

An employer must register with COID within seven days after the day on which he employs his first employee. An employer must register with the Commissioner by submitting Form W.As.2 with the particulars required therein to the Commissioner.

During COID registration copies of the following documentation should be included:

  • the registration certificate from the Register of Companies if they are a company or closed corporation;
  • or their ID document, if they are sole owners of the business.

What are assessment fees?

The annual assessment fee is of an employer is based on their employee’s earnings and the risks associated with the type of work or profession. Before 31 March each year, all employers (including contractors) must submit a statement (return) of earnings reflecting amount paid to all their workers from the beginning of March to the end of February.

Assessment tariffs, reviewed annually, are based on the risks related to a particular type of work.

Payment of assessments

  • Employers must pay within 30 days of receiving the notice of assessment;
  • Employers must apply in writing to settle assessments in installments (not exceeding 12 months);
  • 20% of the outstanding balance due is required upfront before instalment arrangements can be applied for;
  • Should the instalment fall overdue, the full amount becomes due and payable immediately.

Failure to comply may result in:

  • Penalty can be imposed for late submission of ROE (Sect 83(2) – 10%);
  • Estimations will be done if no returns (ROE) are submitted (Sect 83(6)(a);
  • Penalty on non-payment of assessments (Sect 87(1) – 10%);
  • Interest on late payment of assessment (prevailing prime rate);
  • Penalty for late reporting of accidents
  • A penalty is imposed where an employee meets an accident / death and employer is not registered with the Compensation Fund (not exceeding full compensation payable to the employee (Sect 87(2)(a))
  • An employer who fails to comply with a provision of this section shall be guilty of an offence – Sect 81(3)

Contractors and sub-contractors: 

  • Contractors and sub-contractors must register with the Compensation Fund and pay assessments;
  • Failure to comply with the COID Act by the sub-contractor will make the mandatory or main contractor to be responsible for any claims from the sub-contractor’s employees (thus the need for a letter of good standing);
  • The contractor may recover any such payments directly from the sub-contractor.

Letter of Good Standing:

The Letter of Good Standing is a certificate issued by the Compensation Fund to verify that a business actually exists, has paid all its statutory dues, has met all filing requirements and, therefore, is authorised to operate.

Conditions when applying for a letter of good standing:

  • Employer must be registered with the Fund as per section 80 of the COID Act,
  • Employer must have submitted all returns of earnings as per section 82 0f the COID Act,
  • Employer must be fully assessed as per section 83 of the COID Act,
  • Employer must have paid/ settled all outstanding debt as per section 86 of the COID Act.
  • Employers that have entered into an instalment arrangement will only be issued with a letter of good standing on a month‐to‐month basis.

Related: Register A Company In South Africa

What happens if an employee is injured?

employee-injury

The amount of compensation paid to you, depends on how much you were earning when you got injured or diagnosed. If you’ve stopped working by the time a disease is diagnosed, the compensation will be worked out according to what you would’ve been earning.

Types of compensation:

Medical costs: All your medical expenses will be paid for up to 2 years, from the date of the accident or the diagnosis of the disease. You are free to choose a medical service provider you want to consult with. All medical accounts and reports should be submitted to the Commissioner.

Temporary disability:  When you’re unable to work or can’t do all your work because of an injury or disease.

All medical expenses are also paid if the medical accounts are submitted to the Commissioner.

You can claim compensation for temporary disability for 1 year. This can be extended to 2 years, after which the Commissioner may decide that the condition is permanent and grant compensation on the basis of permanent disability.

Permanent disability:  A permanent disability is an injury or illness that you will never recover from. The seriousness of the disability will determine whether you’ll never be able to work again or whether you’ll find work more difficult.  If the disability is more than 30% disability, you will get paid a monthly pension. The size of the pension depends on what your wages were and on the seriousness of the disability.  If the disability is 30% or less, you’ll get paid a lump sum. The lump sum payment is a once-off payment.

Death benefits:  Burial expenses will be paid and the spouse of the deceased and children under the age of 18 (including illegitimate, adopted and step-children) are entitled to compensation.  If a family member that earns money to support the family (breadwinner) is killed by an occupational injury or disease, dependants can claim from the fund.

Company Partners

Company Partners is a leading COID Registration Service Provider in South Africa. They also assist Companies to obtain a Letter of Good Standing from COIDA.

Established in 2006, Company Partners guarantees that the services they offer meet the standards of the best in the industry. Over 30 full-time Consultants offer services and standards of the highest quality.


Useful Links

  1. COID Registration
  2. Letter of Good Standing

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Compliance

How To Stay On The Right Side Of The Law With A Marijuana Business

The verdict is in: It’s not (yet) legal to commercially grow cannabis, but there are multiple business opportunities for home growers that are on the right side of the law.

Nicole Crampton

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“The use, possession and cultivation of cannabis outside of a private space, or by, or around, under-age persons, still remains illegal,” says Paul-Michael Keichel, Partner at Schindlers Attorneys. “The caveat to this appears, however, to be that you may carry concealed cannabis in public, if the intention is to only consume it in a private space, away from under-age or non-consenting individuals.”

“What we are seeing is that most of our clients’ focus has been on the cultivation and commercialisation of cannabis itself. What is seemingly being overlooked are the secondary industries that will emerge or benefit from the legalisation of cannabis,” explains Maurice Crespi, Partner at Schindlers Attorneys.

“Take our M&R (medical and recreational) Cannabis Department as an example. Whilst not planned, it has emerged as a key department at Schindlers Attorneys. If cannabis legalisation presents an opportunity for attorneys, it begs the question as to what industry would not be presented with some form of opportunity as a result of its legalisation.

“Transport, courier services, injection moulding, advertising, fashion, accountants, medical, textiles and so on, are now all in a position to exploit the legalisation of cannabis to their benefit. I’m yet to think of an industry that will not be in a position to benefit from the legalisation of cannabis. Even Coca-Cola has found a way,” says Maurice.

Related: 10 Cannabis Business Opportunities You Can Start From Home

Grey areas yet to be resolved

“The question that has been left open, of course, is how and where does one get the cannabis seeds to grow the plants that one is now permitted to cultivate at home, or in private? Must these be shared, or can they be sourced or sold commercially?” says Paul-Michael.

“Until this answer is clear (we’re researching presently), it’s better to err on the side of caution. However, now that the major part of the fight is lost for them, I would be very surprised if Parliament doesn’t start appreciating the massive potential for increased tax revenue that would flow from a formalised and regulated cannabis industry.

“It serves almost everyone’s interests for them to entertain this option, especially because studies show that full legalisation decreases associated harms more than decriminalisation. Consider quality control, de-stigmatisation, elimination of the black market, beneficiation, and the list goes on,” explains Paul-Michael.

“That stated, SAHPRA (www.sahpra.org.za) is entertaining licence applications by growers and distributors for medicinal use of cannabis. The requirements are very tight but, for those able to comply and get licences, the commercial opportunity is almost unquantifiable,” says Paul-Michael.

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Compliance

Innovative Business Solutions And Compliance

Compliance with certification is a strong way to demonstrate that you are managing your business proactively.

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As a business owner, you are probably aware of where your business could improve. Sometimes a business owner would like to improve their business but is not sure how to begin. Therefore, it is of the utmost importance to develop an environment which will foster innovation and create key steps to improve your business while simultaneously trying to comply with all of the necessary legalities.

It is important for an entrepreneur to assess their situation first. Most business owners will ask the question why? Why can’t everyone will follow the same steps to success. Every business is different and unique, therefore, before you start making changes within your business, it is a good idea to make sure you have a full understanding of the factors affecting your business success and whether you are complying with necessary legalities.

Compliance may actually improve performance by giving your business a competitive edge. Legal compliance can assist you with improving your customer relations, enhancing your reputation and most importantly avoiding the cost of legal proceedings.

There’s this saying, ‘What gets measured gets improved’ explains Charles Gaudet, founder and CEO of Predictable Profits, a consulting firm that offers advanced marketing techniques to entrepreneurs who are passionate about expanding their small businesses.

Related: Compliance For Entrepreneurs

Here are a few strategies that you can use to make your business more profitable in the future.

Innovative Marketing solutions

For every business owner, marketing is an important tool to improve their businesses. You may think that you are missing an opportunity if you don’t jump right attracting customers with some type of marketing message.

However, as quoted by John Rampton ‘’one of the best things you can do to achieve growth is to slow down and spend time studying the trends.” What does this mean?  While rushing into marketing your product you tend to forget certain details, and once it is out in the public its difficult to forget or to undo. Therefore, its very important to research the market and consumer trends before launching anything.

This becomes very important when you consider the potential risk to your business for the infringement of another product, which is confusingly similar to your product. You also do not wish to be guilty of using a similar brand name, slogan or logo as one of your competitors.  Therefore, before you set out your personalised solutions when designing ads and directing messages to consumers ensure you are not infringing on anyone else’s rights as this will likely lead to expensive legal costs for your business.  

Compliance Breeds Confidence

It is important to remember that clients are concerned whether suppliers are properly compliant. Compliance with certification is a strong way to demonstrate that you are managing your business proactively and that the money a customer will spend i.t.o. buying your goods or services, is in safe hands. Conversely a failure in compliance can, as well as exposing you to the risk of regulatory sanctions, severely damage your business’ credibility.

Related: Why HR Legislation Compliance Can Curb Business Failure

For example, in the financial services industry there is an increasing requirement to demonstrate strong security to both external auditors and prospective customers.

With regulation that you feel is of no value, determine how to satisfy the requirements with the minimum effort necessary. Do, however, double check that you are not missing out on a benefit that may be rewarding for your business.

In conclusion, it is important to note when improving your business one always need to act in accordance with the correct laws and procedures. Therefore, if a company is embracing the difficult task of being compliant, I recommend using this as a competitive weapon to improve your business. It just might end up making you and your team better which is usually rewarded with more business.

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