As the future of an economy, businesses are the future of a country. It’s therefore very important that each business owner recognises their responsibility to greater society while they are considering their personal goals.
The unfortunate reality is however, that many businesses under-perform or die before they have actually lived because of poor planning.
At Schoeman Attorneys we are committed to helping our clients make informed decisions and implement strategies that consider their specific circumstances and promote their best interests. We will now briefly discuss some key considerations needed to facilitate proper planning.
Choosing the right vehicle
There are various corporate entities — also called juristic persons — available when electing to start a business. These include:
- Close Corporation (which may not be incorporated any longer since the enactment of the new Companies Act on 01/05/2011)
- Business Trust (although it does not have a separate legal personality)
All companies and corporate entities (save for co-operatives and trusts), regardless of size, have been unified under one legislative banner. The Companies Act 71 of 2008 extensively regulates the formation, management, governance and deregistration or termination of companies.
There are various aspects to consider when electing which company structure (for example, a private or public) is best. Generally, however, a company offers a limited liability and separate legal personality from its members (shareholders). From an estate and continuity planning perspective, this is a great advantage. It is also useful in protecting personal assets from business creditors.
However, remaining compliant with various regulations however present some practical challenges, particularly with regard to management, accountability and administration such as directors duties (management duties).
An annual return must be filed with the Companies and Intellectual Property Commission (CIPC) each year to prevent deregistration. Some companies must meet auditing requirements, and bigger structures face more complex governance and related issues.
Another vehicle to consider is a co-operative. Regulated by the Co-operatives Act 14 of 2005, a cooperative is an autonomous association of persons who have united voluntarily to meet their common economic and social needs through a jointly owned and democratically controlled enterprise.
This is very similar to a company structure and has the same advantages. But one major difference lies in the fact that every member only holds one vote, regardless of shareholding. These enterprises are particularly useful when smaller operations want to stand together to take advantage of bulk buying or association with one another for mutual benefit while retaining their individual business autonomy.
Another vehicle that is quite widely applied, specifically in the real estate development and related industry, but not always fully considered, is a Trust. Trusts are regulated by the Trust Property Control Act 57 of 1988.
In most instances Trusts are not suitable vehicles with which to conduct business. Among other reasons, this is to the lack of limited liability or separate legal personality from its members, along with the normal income and capital gains tax obligations.
On a practical level, the administration of Trusts is generally extremely challenging because the Master of the High Court does not have a national automated system, unlike the CIPC. This lack of automation makes it extremely time consuming and challenging to amend or obtain certain documents.
In addition, unlike Companies and Co-operatives, from a due diligence perspective Trust records are difficult to research because of the nature of the Master of the High Court’s record keeping structures.
However, there are instances where a Trust can be very useful, such as broad-based black economic empowerment (B-B BEE) structures and employee share schemes. Trusts are generally still very useful and relevant in estate planning, when the purpose is to preserve assets or to look after minor children after the death of their parents. Therefore, a Trust structure may play a role in the planning process, where applicable.
It is therefore crucially important that all the appropriate vehicles are properly investigated before starting a business and again when the business is expanded. Due consideration should be given to the specific circumstances and vision of the business owner, which will inform the most appropriate vehicle to implement.
Compliance is essential
Compliance with other relevant legislative provisions is essential, including: choosing a suitable, properly zoned premises; scrutinising your commercial lease agreement before signing it; compliance with the relevant tax laws; having professionally drafted employment contracts; and implementing the relevant policies and procedures to ensure that your internal business documents — whether company documents (memorandum of incorporation), trust deed or a co-operative’s constitution — is aligned with the business plan and with legal compliance.
It is therefore essential that you engage a professional to complete these tasks.
Identifying your target market
Identifying your target market is specifically relevant when you are and contracting with government or big corporates and you are required to comply with legislation such as B-B BEE (Act 50 of 2003). If government or big corporates fall within your current or future target market, it is essential to ensure that your business plan, company documents and related employment and investment strategies align with your B-B BEE strategy.
If you are proactive and align these from the outset, you will be better able to win and retain valuable client contracts.
The next important legalisation to consider is whether your transactions will fall within the requirements of the Consumer Protection Act 68 of 2008. Generally, the Consumer Protection Act is a law of general application and therefore applies to every transaction between a consumer and supplier within South Africa.
However, because of their size, certain juristic persons (specifically large juristic persons) are excluded from the protection given to consumers under the Act. Although we do recommend that companies comply with the Consumer Protection Act and commit to rendering a high quality service towards consumers, in a certain sense lawful non-compliance does offer more contractual freedom.
At Schoeman Attorneys we specialise in a range of services designed to best serve both individuals and businesses. These services include commercial or business law, contract drafting, mining law, civil litigation, antenuptial contracts, wills and estate planning.
We believe that through proper planning in structuring business affairs and by implementing risk aversion strategies it is possible to pave the way forward for business growth that will result in the creation and sustenance of wealth.
Taking this approach, the individual behind the business will be able to structure their personal affairs most effectively to allow them to enjoy the fruits of their hard-earned money.
This is why we recommend that each person, regardless of whether they are a business owner or not, implements estate and personal planning strategies that includes a professionally drafted will. We also further recommend that you regularly update your will and appropriate estate plan so you can protect the fruits of your hard earned labour from unnecessary risk.
We often compare the integration of these services with the construction of a house. At bottom level is the foundation, which is the antenuptial contract that directs many of financial decisions that will follow in a person’s lifetime.
Above the foundation are the walls of the house, which are the business structuring, contract drafting and the personal financial planning strategies that a person will implement during their lifetime to create revenue and create sustainable wealth.
Last but not least is the roof, which is the will that protects everything that has been built up below it, keeping the contents safe and ensuring a lasting legacy. Buildings with cracked foundations, poorly constructed walls or inadequate roofs never stand for long. It is therefore essential that a professional deals with all these aspects.
Alan Knott-Craig Answers Your Questions On Money And Partners
From starting the right business, to managing business partners and finding your magic number, there is a secret to happiness.
If I get rich will I be happy? — JC Lately
Does money equal happiness? Mostly, yes. Research in the US shows that your happiness is proportionate to your earnings up until you earn $80 000 per annum. Thereafter, incremental income gains have a negligible effect on your happiness.
In other words: More money will make you happy as long as you’re poor. Once you break out of poverty and enter a comfortable middle-class existence, more money will not make you happier.
These are the top three for old folks:
- I wish I’d spent more time with family.
- I wish I’d taken more risks.
- I wish I’d travelled more.
Therein lies the secret to happiness. Spend time with your family. Take risks. Travel.
But first, make money. Don’t do any of the above until you’re making enough money not be stressed about money.
What is the magic number? — Mushti
The magic number is the amount of money you need to not worry about money ever again. If you don’t need toys like Ferraris, yachts and jets, the magic number is R130 million. Here’s the math: R130 million will earn R9,1 million in interest annually (assuming 7% interest). After tax that is R5,46 million.
Assuming you need 50% to maintain a good lifestyle, that leaves approximately R2,7 million for reinvestment, which is enough to keep your capital amount in touch with inflation for 50 years. The balance of R2,7 million (after tax) is for your living costs. In South Africa, R2,7 million will afford you a lifestyle that allows you to send your kids to a great school and university, to travel overseas a couple of times a year, and to live in a comfortable house.
Over time your living costs (and inflation) will eat into your capital amount. After 50 years you should be down to nil, assuming you earn zero other income in that time.
In 50 years, you will probably be dead. If you’re not dead, your kids will be able to support you (because they love you and they have a great university education).
I am the sole director of a company (the others still have full-time jobs and don’t want to be conflicted) and there is pro-rata shareholding based on our initial shareholder loans. However, I am putting in most of the hard work, together with one of the other actuaries. How best do I manage the director/shareholder dynamic? I obviously want to make as much progress as possible but there are times when I need the input from the others (and their responses aren’t always as quick as I would like). — Mike
If you have any perception of unfairness regarding effort/risk vs reward, deal with it NOW! You can’t do so later. The best approach is honesty. Call your partners together. Explain your thinking. Perhaps argue for 25% ‘sweat equity’ for yourself. Everyone dilutes accordingly. Ideally cut a deal whereby you have an option to pay back all their loans, plus interest, within six months, and you get 100% of equity (unless they quit their jobs and join full-time).
Equity dissent must be resolved long before the business makes money, otherwise it will never be resolved.
What do you think of WiFi in taxis?— Ntembeko
It’s a good idea, but not original. Before embarking on a start-up, you should survey the landscape for competitors. Just because there are none doesn’t mean no one has tried your idea.
It just means that everyone that tried has failed. You need to be 100% sure that you have some ‘edge’ that makes you different from everyone who came before you (and failed). Otherwise you will fail. What is your advantage that is different to everyone who came before?
Read ‘Be A Hero’ today
What You Need To Know About The Lean Start-up Model
The Lean Start-up philosophy was developed by Eric Ries, a Silicon Valley-based entrepreneur who also sat on venture capital advisory boards. He published The Lean Startup in 2011, igniting a movement around a new way of doing business.
The model follows key precepts that include:
Taking untested products to market
The fact that too many start-ups begin with an idea for a product that they think people want, spending months (or even years) perfecting that product without ever testing it in the market with prospective customers.
When they fail to reach broad uptake from customers, it’s often because they never spoke to prospective customers and determined whether or not the product was interesting. The earlier you can determine customer feedback, the quicker you can adjust your model to suit market needs.
The ‘build-measure-learn’ feedback loop is a core component of lean start-up methodology
The first step is figuring out the problem that needs to be solved and then developing a minimum viable product (MVP) to begin the process of learning as quickly as possible. Once the MVP is established, a start-up can work on tuning the engine. This will involve measurement and learning and must include actionable metrics that can demonstrate cause and effect.
Utilising an investigative development method called the ‘Five Whys’
This involves asking simple questions to study and solve problems across the business journey. When this process of measuring and learning is done correctly, it will be clear that a company is either moving the drivers of the business model or not. If not, it is a sign that it is time to pivot or make a structural course correction to test a new fundamental hypothesis about the product, strategy and engine of growth.
Lean isn’t only about spending less money
It’s also not only about failing fast and as cheaply as possible. It’s about putting a process in place, and following a methodology around product development that allows the business to course correct.
Progress in manufacturing is measured by the production of high quality goods
The unit of progress for lean start-ups is validated learning. This is a rigorous method for demonstrating progress when an entrepreneur is embedded in the soil of extreme uncertainty. Once entrepreneurs embrace validated learning, the development process can shrink substantially. When you focus on figuring the right thing to build — the thing customers want and will pay for, rather than an idea you think is good — you need not spend months waiting for a product beta launch to change the company’s direction. Instead, entrepreneurs can adapt their plans incrementally, inch by inch, minute by minute.
Start-Up Law: I’m A Start-up Founder. Can I Pay Employees With Shares?
Bulking up employee salaries with equity is a common method to attract, retain and incentivise top talent.
Every early stage start-up company battles with restricted cash flow and not being able to pay market related salaries to their employees. Bulking up employee salaries with equity is a common method to attract, retain and incentivise top talent.
Can I pay salaries with shares?
South African labour laws require that employees be paid certain minimum wages, and “remuneration”, as defined within the Basic Conditions of Employment Amendment Act, either means in ‘money or in kind’. ’In kind’ does not include shares or participation in share incentive schemes, as determined by the Minister of Labour. As such, there is no room for start-ups to completely substitute paying salaries with shares or share options. However, there is no restriction in topping up below market related salaries with equity via an employee share ownership plan (‘ESOP‘).
Employee Share Ownership Plans
There are a variety of ways in which employees can be incentivised, and it will always be important for the start-up founders to consider what goal they wish to achieve by incentivising their employees.
ESOPs can be structured in several ways, for example: employees may be offered direct shareholding in the company, options for the acquisition of shares in the future; or alternatively, a phantom / notional share scheme can be set up.
ESOPs permit employees to share in the company’s success without requiring a start-up business to spend precious cash. In fact, ESOPs can contribute capital to a company where employees need to pay an exercise price for their share options or shares.
The primary disadvantage of ESOPs is the possible dilution of the Founder’s equity. For employees, the main disadvantage of an ESOP compared to cash bonuses or bigger salaries, is the lack of liquidity. If the company does not grow bigger and its shares does not become more valuable, the shares may ultimately prove to be worthless.
Some key features to consider when setting up an ESOP are:
- ELIGIBILITY – who will be allowed to participate? Full time employees? Part-time employees? Advisors?
- POOL SIZE – what percentage of shares will be allocated to incentivise employees?
- RESTRICTIONS – will employees be able to sell their shares immediately?
- VESTING – will there be a minimum period that service employees will have to serve with the start-up to receive the economic benefit of his or her shares?
Employee share ownership plans are great corporate structuring mechanisms for attracting and retaining employees, as well as fostering an understanding of the company ethos and encouraging loyalty and productivity. It is essential when implementing an ESOP that all the tax implications are considered and that the correct structure and legal documentation are in place.
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