The new Companies Act, which came into being earlier this year, has meant that South Africans are starting businesses in a more legislated environment. The Act brought with it many changes that affect not only existing businesses but start-ups as well.
The Companies Act, 2008 has been modernised and brought into line with international best practices. It was drafted in plain language with many of the sections and rules being simplified.
Some of the main features of the Act include:
- Fewer statutory forms are required to incorporate a company. Instead of a memorandum of articles of association, a company’s constitutional documents consist of one document only, the Memorandum of Incorporation (MoI). The MoI sets out the rights, duties and responsibilities of shareholders, directors and others in relation to the company.
- Companies are allowed to change certain requirements according to their own circumstances.
- Different types of companies must comply with different rules. This means smaller companies have less arduous responsibilities than large public companies when it comes to corporate governance and financial reporting. For example, smaller companies will be subject to less taxing financial reporting standards than larger companies.
- The regulatory burden on companies has been reduced but there are stricter accountability and transparency requirements for state-owned and public companies.
- High standards of corporate governance are encouraged, with minimum accounting standards having been set for annual reports. There are also stricter provisions governing directors’ conduct and liability, and their common law duties and liabilities have now been codified. A company is prohibited from reckless, negligent or fraudulent trading, and persons who were knowingly party to such conduct are guilty of an offence.
- The Act contains new structural arrangements, with the introduction of new regulatory institutions and the transformation of others. Companies are now classified as either profit or non-profit companies.
- The concept of business rescue is broadened and formalised, and provision is made for a modern business rescue regime.
- There is a move towards the decriminalisation of company law and the establishment of bodies for the effective enforcement of the legislation. Minority shareholders and other stakeholders, including employees, will have better protection, powers and remedies under the Act, including the ability to bring class actions.
1. A new institution
The Companies Act saw the migration of the Companies and Intellectual Property Registration Office (CIPRO) into the Companies and Intellectual Property Commission (CIPC). The Commission not only replaces CIPRO but it has additional functions and powers.
The main functions of the Commission include:
- Registering companies, co-operatives and intellectual property rights and maintaining such register;
- Disclosing information on its register;
- Promoting education about, and awareness of, company and intellectual property law;
- Promoting compliance with the relevant legislation;
- Ensuring the efficient and effective enforcement of relevant legislation;
- Monitoring compliance with and contraventions of financial reporting standards, and make recommendations in this regard; and
- Reporting to, conducting research for, and advising the Minister of Trade and Industry on matters of national policy relating to company and intellectual property law.
2. The Act and company formation
Applying the principle that the incorporation of a company is a right, rather than a privilege, the Act places minimal requirements on the act of incorporation.
A company is incorporated by the adoption of a MoI, which is the sole governing document of the company. It imposes certain specific requirements on the content of a MoI which are necessary to protect the interests of shareholders in the company.
3. Meetings and notices
The new Companies act regulates meetings. In terms of attendance of meetings, it requires that shareholders can be represented by way of a written proxy, which is valid for one year. Physical attendance is not mandatory, and meetings may be conducted entirely by electronic communication. The Act requires that shareholders must be able to communicate simultaneously.
The notice periods for meetings are as follows:
- 15 business days for public companies
- 10 business days for private companies
4. Duties of directors
It is essential that directors know their rights and are aware of what is expected of them. They are subject to the common law as found in court rulings and judgements. The Act has introduced a partial codification of directors’ duties, including both a fiduciary duty and duty of reasonable care, which operate in addition to the existing common law duties.
A director is required to act in good faith and for a proper purpose in the best interests of the company. They should act with the degree of care, skill and diligence that may reasonably be expected of a person carrying out such functions and having the same skill and experience of that director (the reasonable man/woman test).
Furthermore, directors are required to disclose any personal financial interests. They may not use their position as director or information gained as a director to make a secret profit or gain advantage for themselves or someone else or to cause harm or detriment to the company.
The new Act deals comprehensively with the election, disqualification, vacancies, removal, meetings, resolutions and liabilities of directors:
- Appointment: In a private company, there has to be a minimum of one director, while for a public or non-profit company, the minimum is three. Each incorporators of a company becomes its first directors. Directors are thereafter appointed by the majority of shareholders entitled to vote on their election, for an indefinite term or as the MoI stipulates. Any vacancies on the board may be filled temporarily by election of other board members or as the Memorandum of Incorporation provides.
- Disqualification: A person is disqualified from acting as a director when they are declared delinquent by a court, a juristic person, an un-emancipated minor, an un-rehabilitated insolvent, prohibited by public regulation, removed from office of Trust due to dishonesty, convicted of a crime of dishonesty without option of a fine or if they do not meet the qualifications set out in the MoI of the company.
- Removal: A director may be removed by an ordinary resolution of shareholders entitled to vote, or by board meeting (when alleged that director is disqualified, incapacitated or negligent in duties). The director must be given the opportunity to be heard at a meeting before the board can vote on removal. The removed director has the right to apply to court for damages for loss of office.
- Board meetings: The board authorised director may call a meeting at any time. They must call a meeting when 25% of directors (when the board has at least 12 members) or two directors in any other case, request a meeting. The company must keep minutes of all board meetings and every resolution taken at a meeting. Each director has one vote and majority vote approves a resolution.
- Liability: A director could be held liable to shareholders for fraudulent acts of gross negligence or to a third party who has suffered damages due to the acts of the directors. Amongst previously mentioned liabilities, they are also liable for breach of fiduciary duty, or delictual act, acting without authority, party to supplying false or misleading information about the company or making an untrue statement in a prospectus.
- Indemnification and Insurance: A company may not indemnify a director for wilful misconduct or breach of trust, or for a director acting without proper authority from the company or undertaking a prohibited act, or for perpetuating a fraudulent act. A company may take indemnity insurance on behalf of its directors in order to aid in any lawsuit against the director as related to the company. A company may purchase insurance to protect a director against permitted liability.
While the Act has removed many of the criminal offences which were found in the previous Companies Act, the potential for civil claims against directors in terms of the New Companies Act is far greater. Members of the board, and audit committees, have the same liability as directors, even if the members of the board committees are not directors and even though they have no voting rights on matters considered by the board committees.
5. Accountability and transparency
The Companies Act, 2008 has set certain common requirements for all companies. However, differentiated requirements depend on the company’s wider responsibility to the public and the social and economic impact that the company’s operations have.
The requirements include:
- All companies must prepare annual financial statements (AFSs), unless a company can satisfy the Commission that it meets certain criteria.
- All companies have to file annual returns with the Commission.
- Certain private companies with a greater responsibility to the wider public as a consequence of their significant social or economic impact may be required to have their AFSs audited. All other companies must be either voluntarily audited or independently reviewed.
- All financial statements must satisfy the prescribed financial reporting standards. These standards may vary for different categories of companies but must be consistent with International Financial Reporting Standards as set by the International Accounting Standards Board.
- All public and certain private companies must appoint an auditor.
6. Business Rescue
The Act has replaced the previous regime of judicial administration of failing companies with a modern business rescue (BR) regime. The regime is largely self-administered by the company, under independent supervision within constraints set out by the Act, and subject to court intervention at any time on application by any of the stakeholders.
The Act protects the interest of employees and workers by:
- Recognising them as creditors of the company with a voting interest to the extent of any unpaid remuneration before the commencement of the rescue process;
- Requiring consultation with them in the development of a BR plan;
- Permitting them an opportunity to address creditors before a vote on the plan; and
- Giving them, as a group, the right to buy out any uncooperative creditor or shareholder who has voted against approving a rescue plan.
BR proceedings begin when the board passes a resolution that the company voluntarily begins BR proceedings, or when an affected person, such as a shareholder, creditor, employee or organised labour, applies to court for BR proceedings.
The BR process includes the following steps:
- Within five days after passing the necessary resolution, the company must appoint a BR practitioner and publish the notice as prescribed.
- The company must then file the appointment of the BR practitioner with the Commission and inform all affected parties of the appointment.
- During BR proceedings, no legal proceedings may commence or proceed against the company in any form.
- BR proceedings end when a court sets aside a resolution or order that began BR proceedings or converts BR proceedings to liquidation proceedings; the BR practitioner files a termination notice of BR proceedings; the BR plan has been rejected; or the BR practitioner has filed a substantial implementation of the plan.
- During BR proceedings, all directors of the company can only act by authority of the BR practitioner.
Understanding Your Responsibility As An Employer
Now that you have your own employees, here is what you should know about your new responsibilities.
Hiring employees requires more work from you as the employer than simply placing a job ad, hiring the right person and training them on their role.
You need to be aware of the Labour Law requirements in terms of the various funds and other stipulated registrations.
Related: 5 Factors That Make a Great Boss
The law does not differentiate between different size organisations, and therefore it is imperative that SME’s fully understand the implications of all aspects of Labour legislation.
How To Write A Business Plan
A useful guide on how to write a business plan.
An international study showed that only 42% of small-business owners actually took the time to write a formal business plan, but of those who did, more than 69% said it contributed greatly to their success.
It’s no surprise that most experts and financial institutions advise those thinking of starting their own business to put together a comprehensive business plan first.
Related: Business Plan Format Guide
But before you put pen to paper, there are a few vital exercises you need to go through to ensure your business idea is a viable one.
Step 1: Research
The business you plan to start might be in an industry you have some experience in or it might be totally new to you, either way you need to do in-depth research into the industry and market to make sure you fully understand how it operates.
Your research should include:
- Understanding the dynamics and forces affecting the industry
- The preferences and characteristics of your target market
- Insight into how many competitors are already operating and the quality of their product or service
- Finding out who you could partner with to start the business
- How your product or service will be created and delivered
- How it is different from those that already exist, and identifying a profit and operating model for the business.
Some of the sources you can turn to for this information include:
- The Internet
- Industry experts and associations
- Suppliers who play a key role in the industry
- Existing competitors in the industry
- Interaction with member of your team.
Step 2: Stress-test your business concept
Many people are infatuated with their new business idea before they have properly evaluated whether it is worth the time and money they need to invest in it.
FREE Business Plan Template Download
An idea should be stress-tested before producing and selling it.
- Technical feasibility: When considering the technical feasibility you need to know if the technology for your product or service is available or still in development, what possibilities are there that the end user might not want to use your technology and what other technologies could becoming competition in future.
- Market feasibility: The market feasibility refers to the actual need for what you are selling, how large is the market and how fast it is growing. You need to know who your customer is, what their needs are and the advantages and disadvantages of your product or service over the competition.
- Financial feasibility: You also need to determine the financial feasibility by determining what the sources of revenue for the business are, what the major costs are for the new business, is there a good profit margin, what capital is required to launch the business, how long the business will take to break-even and you should develop best-case and worst-case scenarios regarding your cash flow. If you are using your business plan to apply for funding, the funder will also want to see that your cash flow will adequately cover your running expenses and enable you to re-pay their loan.
- Team feasibility: When looking at the team skills you will require to get your business off the ground, you should identify how many people it will take to make your business happen, what cost they will come at and develop a timeline for staffing if your budget does not enable you to hire staff immediately. If you intend to run the business by yourself then determine the skills and expertise you will require (marketing, sales, financial, etc). If you are not equipped with these skills, you should consider bringing a partner on board, outsourcing and/or up-skilling yourself.
Step 3: Refine your business concept
Based on the findings from your research and once you have stress-tested your idea, you may have identified weaknesses or opportunities.
The findings will allow you to refine the business idea so that it fills any gaps in the industry, meets market demands, is different from competitor offerings, leverages relationships with partners and suppliers and is financially sustainable.
Step 4: Writing the business plan
While a business plan doesn’t automatically guarantee success, it does assist an entrepreneur to avoid many of the common causes of business failure, including undercapitalisation or an inadequate market-share.
Related: Sample Business Plans
While there is no universal business plan template, plans generally include the following sections:
1. Table of Contents
This features the main headings of the business plan and their page numbers for easy reference. Finalise this section last to ensure the numbers are all correct.
2. Executive Summary
The executive summary is a summary of your full business plan. It contains the summary highlights of each section of your.
It should also describe the company, provide details about management and their strengths, the business objectives and why it will be successful, and if the business needs external funding, how much is needed, and how it will be repaid.
The executive summary is written last and should not exceed two pages in length.
3. General Company Description
This is where you give an overview of the company and the business it engages in.
It should include the company’s name, mission statement, goals and objectives, and strengths.
If you have a register company name, trademarks, patents, BEE credentials and/or a VAT number include those details here.
4. The Opportunity Industry & Market
Based on the research you conducted prior to writing the business plan, you will discuss the opportunity you have identified, the ‘gap’ that exists in the market. You’ll need to detail why this gap exists, how you identified it and how you will fill it.
When writing about the industry you must answer questions about:
- The ‘barriers to entry’ (how easy or difficult it is for future competitors to enter the same market and offer the same product or service as you do)
- Who the customers are and the influence they have over prices
- Who the suppliers are and their influence over the prices
- Who the competitors are and how strong their products or services are and the major changes affecting the industry.
Regarding the market you need to state the total size of the market, what percentage of the market share you will have, and major trends.
5. Business Model
The business model you choose will be a strong determining point of the future the success of your business.
Your business model must include information on what your companies offers in terms of products or services; what makes your offering unique; who you sell them to; and how you make your money.
You need to take into consideration the source of revenue, the major costs incurred in generating revenue, the profitability of the business, the investment required to get the business up and running and the critical success factors for the model to work.
Discuss how your business will compete in its specific market.
You need to explain the strategic choices you have made including the focus of the business, how you will create a unique and valuable proposition, what is unique about your business and what value there is for customers.
You must also include your plan for how you intend to enter the market and grow your market-share.
7. Team: Management & Organisation
You will provide a breakdown of the people in the business. It should include a list of founders including their qualifications and experience, a description of who will manage the business, and an organisational chart if you have over 10 employees.
8. Marketing Plan
This should provide details on your marketing strategy based on your market research.
The marketing plan should include important marketing decisions about the product or service and the value thereof, a detailed description of the target market, the product or service’s positioning, the pricing strategy, the sales and distribution channels and the promotion strategy.
9. Operational Plan
An explanation of the day-to-day operation of your business. It should include the business’s operating cycle, where the skills and materials will be sourced from, if anything is to be outsourced and how you will manage those relationships, and the cash payment cycle.
10. Financial Plan
The financial plan is an overview of your business’s financial future. You should back up the main features of the financial plan with accurate financial projections.
The most important information to include in this section includes start-up expenses and capitalisation, a 12-month profit and loss projection, a 12-month cash-flow projection, a projected balance sheet at start-up and the end of years one and three and a break-even calculation.
This section contains any supporting documentation you think the reader would want to refer to and could include:
- Brochures and advertising
- Industry studies
- Blueprints and plans
- Maps and photos of locations
- Lists of equipment
- Letters of support from future customers
- Market research studies
- Detailed financial calculations and projections.
- Business plans vary from one organisation to the next as well as the reason for the business plan. If you are writing the business plan to submit to a bank or other institution for funding you should contact the institution beforehand to find out what their specific requirements are for business plans. If you aren’t looking for funding your plan will look different and there should be a focus on cash flow.
- If you are using your business plan as a tool to attract funders, partners or suppliers, the executive summary is the section that will be viewed first. The contents of the summary therefore must make a good impression and clearly demonstrate opportunity and viability.
- Some entrepreneurs are concerned that those who read it could steal their ideas presented in the business plan. While some experts say this really isn’t something to worry about since it is the execution of an idea that is most important, if you believe your plan contains proprietary intellectual property, you should take steps to protect your ideas by registering trademarks and/or patents.
- Using visuals like graphs, tables, diagrams and photos will capture readers’ attention. If you are communicating technical or complex ideas use a graph, table or diagram to increase the likelihood that the information will be read and understood.
- If you are presenting your business plan to third parties, ensure have corrected all spelling and grammatical errors. It is a good idea to give it to someone with strong language skills to edit it for you. Spelling mistakes make a bad impression.
- There are many people who offer to write business plans on your behalf. This is not the best route to take as the process of putting the plan together will identify areas that need further research and help you determine the viability of the idea. It will help you know your business inside out, which is especially essential when presenting to potential investors.
- If you don’t have a strong financial background, you can get assistance from someone who has, but be sure to let them explain the different aspects of your business’s financials. They will help you by pointing out key areas like payment terms and cycles, cash flow and any other discrepancies in your plan.
- One of the most common mistakes people make is in creating unrealistic and over-optimistic projections. You must spend enough time collecting relevant and realistic figures for your financials. As a rule of thumb, experts recommend that start-ups halve their revenue projects and double their expenses.
- Don’t make the business plan too long. In general it shouldn’t exceed 25 pages as this puts people off reading it. If you have more than 25 pages, cut out unnecessary information and include it in the appendix.
Zoning and Permits
If you are thinking about setting up a business in a residential area you will need to know about zoning.
Have you considered the legal ins and outs of starting a business in a residential area? You will need to know about zoning.
The Home Office
You want to open a simple consultancy, for example. You start out on your own, as so many entrepreneurs do, at home in your spare room. No inconvenient trading licences to worry about. As you take on some support staff, you hire your first few square meters of office space. Times are good and suddenly your new business is legit and firing on all cylinders.
Clients are happy, word of mouth has taken care of your marketing and you’ve had to take on more staff to cope with the increased workload.
All of a sudden you no longer fit into the modest office space you hired for your fledgling business and you have to think about expanding. But you’ve been paying rent for over two years and it seems such a waste. And now that you think of it, you were considering selling your substantial home and moving into a lock-up-and-go townhouse.
It occurs to you that perhaps you should keep the house (it’s an asset after all) and convert it into business premises. That way you’ll save on rent.
On the surface it all seems to make perfectly good business sense. Except for one thing. Your house is in a residential area and therefore not zoned for business purposes. In order to trade as a business on those premises, you will have to apply for the property to be rezoned – and the time and energy needed to achieve that may make another year’s worth of paying rent not seem so onerous after all.
If you are operating a one-person business, don’t employ staff and don’t have clients calling regularly at your premises, you don’t have to apply for business rezoning. But if you need to put up signage, expect clients, suppliers and staff, and if the property is used solely for business purposes then, in all likelihood, you’re in for a rezoning application.
If you are searching for a business premises, here is what you need to know about leases and landlords.
The Rezoning Battle
But here’s the catch – applying for a property to be rezoned as a business in no way means that it will automatically happen. As South African cities boom with business growth and congestion becomes an ever-increasing cause of frustration and wasted time, businesses are moving out of the CBD and into what were previously residential areas.
This is a natural phenomenon of urban geography and over time, as residents realise the potential value of selling up their homes to businesses that want to move in, areas are rezoned for business. However, if an area is not yet zoned for business, the residents usually have fairly strong objections to it becoming so.
Businesses generate traffic and parking problems. Local councils typically take the concerns of residents seriously and are reluctant to rezone an area for business on the strength of one application.
Add this to the fact that every local authority has a different set of parameters which guides rezoning decisions – and that each application is taken on its individual merits – and the process becomes extremely complicated.
Ultimately, if you want to avoid the daily horrors of traffic and purchase your own business premises in a residential neighbourhood, your best bet is to set up shop in an area in which other businesses are already established. After all, there is strength in numbers and this greatly improves your chances of getting the area rezoned.
Related: Register A Company In South Africa
To apply for rezoning in an area that is not zoned for business, you have to secure a zoning scheme departure or special consent from the City Council. Getting this can take a while – in some cases up to three months. You may need to advertise your business’s intention to conduct a particular business activity in the local newspapers.
Residents and other stakeholders will have the chance to respond with any complaints, which are heard by a board, before you will be granted or denied the departure. Being granted a departure usually paves the way for successful zoning approval but, once again, there are no guarantees. And all the while, you can’t operate legally as a business in that particular area.
When it comes to the legal side of setting up a business, it pays to do your homework and get professional assistance where appropriate. The cost of mistakes and bad judgement calls in this area can be severe.
Trading licences are governed by the Business Act of 1991, No. 71, which states that certain businesses require licences. These include:
- Those that sell or supply meals or perishable foodstuffs
- Those that provide certain types of health facilities or entertainment. These are defined as Turkish baths, saunas or other health baths; massage or infrared treatment; escort services (male and female); games halls that have coin- or token-operated mechanical or electrical devices or three or more snooker or billiard tables; night clubs and discothèques; cinemas and theatres, and “adult premises” as referred to in section 24 of the Films and Publications Act, 1996
- Those that hawk meals or perishable foodstuffs
Before you open your doors, you had better check whether your business needs a special permit or licence. Certain types of businesses, namely those that sell, hawk or supply meals or perishable foodstuffs and those that provide certain types of health facilities or entertainment, require a licence to trade. In addition, purveyors of liquor need to apply for a liquor licence.
To obtain a trading licence for your business, you need to apply to the Licensing Department, which in turn requires reports from the health and fire department and town planning. The latter two departments will check that your business meets health and fire regulations and that your proposed premises are in an area zoned for business.
- Provincial and Local Government directory
- South Africa Government Services: Permits, Licences and Rights
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