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Chapter 13 - Small Business Law

Types of businesses

If you want to start a business, you must decide whether you want your business to be:

• a sole trader or sole proprietor
• a partnership
• a close corporation
• a company

Sole trader or sole proprietor (owner)

A sole trader or a sole proprietorship means one person owns the business. A sole trade does not have to register the business, for example, Vusi starts a shoe repair business which he calls ‘Cool Leather’ and runs it from his home.

If you are a sole trader, the law does not make a difference between the things that you own and the things that belong to your business, which are called assets. This means that the tools which Vusi uses to repair shoes, the table on which he works and the cash register belong to him in the same way that his television set or his bed does.

There is also no difference between the money you owe people and the money your business owes people, which are called debts. For example, the money Vusi must pay for electricity is no different from the money he must pay the man who sells him leather to repair shoes. If Vusi doesn’t pay his leather supplier for leather bought from him, the supplier can go to court to get his money. If Vusi does not have the money to pay the supplier, the court can take away his tools, his TV, his car, or anything that is a luxury, and sell it to pay the supplier.

As Vusi, a sole proprietor, has given the business a name, he must refer to it in any business dealings as ‘Vusi Mahlangu t/a (trading as) Cool Leather’.

Partnership

A partnership is a business that has between 2 and 20 partners who own the business together. If two or more people want to start a partnership, they should sign a written agreement. A lawyer should prepare this. (See What are the requirements for a contract?) The agreement must include these points:

• what happens to the assets of the business, for example, the tools and the furniture, if the partnership ends;
• how the partners will share the profits, for example, one partner works every day and another partner only works three days a week; they would not want to share the profits equally because the one partner has worked more days than the other;
• what happens if one of the partners wants to leave the partnership.

Every time a new partner joins, the partners must sign a new agreement. Like a sole trader, the law does not recognise a difference between the partnership's assets and debts and the assets and debts of the partners themselves. Not only that, but the law does not recognise a difference between different partners' assets and debts. For example Nomonde's business partner Vuyani builds a house and does not pay the builder. The builder takes him to court to get his money. The court can take the tools and furniture of the partnership and sell them to give the builder his money. The court can do this because there is no difference between Vuyani's assets and debts and the assets and debts of the partnership. So Vuyani's debts are also the debts of the partnership. If Vuyani cannot pay the builder, the builder can get his money from the partnership. Nomonde would be able to go to court to get the money back from Vuyani, but it is expensive to pay lawyers to take a case to court and it takes a long time before the court will hear her case.

If Vusi, decides to run his Cool Leathers as a partnership, he must refer to the business in any business dealings as ‘Vusi Mahlangu t/a Cool Leather’.

Close corporation (CC)

A close corporation is like a company, only less expensive and less complicated to run. A lawyer or an accountant can register a business as a CC.

A CC is more expensive to run than a partnership or sole trader because you need to pay an ‘accounting officer’ to do the books of the business. You also have to keep records for the CC and each member has to keep records for tax purposes. Therefore it is only a good idea to register a CC if it is very important to have limited liability, remembering that suppliers and banks could ask for suretyship in any case.

See Problem 1: What type of business to start.

The people who own and manage the close corporation are called members. There are no directors or shareholders or a chairperson of the board, like a company has. A close corporation cannot have more than 10 members.

The law sees a close corporation as separate from its members. This means that unlike a sole trader and a partnership, the assets and debts of the business belong to the close corporation, and the assets and debts of the members have nothing to do with the CC.

For example, a Cool Leathers CC buys leather from a supplier to repair shoes. The CC does not pay the supplier for six months. The supplier decides to go to court to get his money from the CC. If Cool Leathers does not have the money to pay the supplier, the court can only take the things that belong to the business, Cool Leathers, to pay the debt. The court cannot take the private things that belong to Vusi and Linda, who are the members of Cool Leathers.

Signing surety

Suppliers may be scared that a CC has no money to pay. Suppliers therefore often make sure that somebody signs surety for the CC, which means that if the CC does not have the money to pay, the person who has signed the surety will have to pay (be liable for) the debt.

Members of a close corporation must always write CC behind the name of the close corporation, for example Cool Leathers CC. If members do not put CC behind the name whenever they write it, then the law does not see the CC as separate from its members and the debts and assets of the CC are not separate from the debts and assets of the members.

If the business is a CC and the business has a letterhead, the registration number of the CC and the full names of the members must be printed on the letterhead. The number will look something like this: CK2008/031666/23.

If the business has an office, then the owner must have a sign up showing the business is a CC. For example, if Anna has a dry cleaning business, then she must have a sign up saying "ANNA’S DRY-CLEANING SERVICES CC’.

Company

Companies have to obey all the rules of the Companies Act, which is a long and complicated law.

If more than 10 people want to start a business together, they cannot form a CC. They will have to go to a lawyer to form a partnership or a company.

A company has shareholders and directors. Shareholders can be people or other companies. Shareholders put the money into the business and are the owners of the business. Directors are the managers of the business. Sometimes the owners and the managers are the same people and sometimes they are different people.

The law sees a company as separate from its shareholders and directors. This means that like a CC, the assets and debts of the business belong to the company and the assets and debts of the shareholders and directors have nothing to do with the Company.

Suppliers or banks, which lend money to companies will often ask the shareholders or the directors to sign surety for the company. If the company cannot pay its debts, then the people who have signed surety will have to pay the company's debts.

Directors and shareholders must always write Pty (Ltd) behind the name of the company. If they write the name of the company without writing Pty (Ltd) behind it, the law does not see the company as separate from its shareholders, and the debts and assets of the company are not separate from the debts and assets of the shareholders.

If the business is a company and the company has a letterhead, the registration number of the company and all the names of the directors must be printed at the bottom of the letterhead.

The differences between the four types of businesses

Advantages and disadvantages of the different types of businesses

Co-operatives

A co-operative is a business formed by a group of people who all own the co-operative and participate in its control. So, the business is owned and run by its members who buy shares to become members. All the members of the co-operative have one vote each so that even if a company buys many shares in a co-operative, it still only has one vote, like everyone else. Members elect three or more directors who manage and control the daily affairs of the co-operative and who are answerable to the members.

Financing a co-operative

Members contribute to the “capital” of their co-operative and control the economic affairs of the co-operative in a democratic way. “Capital” is the money and equipment which the co-operative uses to carry out its goals. Co-operatives can get capital from money paid for shares issued to members, membership fees, grants, donations, loans and surplus money left over from previous years of operation. Some (and possibly all) of the capital which the co-operative uses actually belongs to the members, usually in the form of shares and bonus shares. Each member invests some money and gets some shares in return. The shares show that the member owns some of the assets (the money and property) of the co-operative. Any other capital which the co-operative uses belongs to the co-operative as a whole.

Profits in a co-operative

Although a co-operative is not formed with the aim of making profits, most co-operatives do have a bit of profit to divide up after paying employees and meeting other expenses. In a co-operative all the members own the profits. If the co-operative has money left over after it has paid all its debts and taxes and provided the planned benefits to its members, this is called a “surplus”. The surplus is normally used to develop the co-operative. For example, a co-operative can use its surplus to expand and develop the co-operative’s business or the services it offers to its members. But if there is an extra unplanned surplus, this means that (in a worker co-operative) the wages could have been higher or (in a service co-operative) the prices or fees or commissions charged for the service were too high. In this case, the surplus can be returned to the members, or used to support other activities approved by the members. Any surplus that is returned to the members must be shared in proportion to the contribution each member made to the surplus. For example, a grocery co-operative might return a portion of its surplus to its members, in proportion to the value of the purchases made by each of them during the year.

Overall, members do not usually receive a big return on the amount they contribute to the capital of the co-operative when they become members. This makes a co-operative different from a company. A shareholder in a company buys shares in the hopes of making a profit. A member of a co-operative joins the co-operative and contributes to its capital because the co-operative will provide a benefit to its members.

The purpose of a co-operative

The primary aim of a co-operative is to provide services to its members. The goal of a co-operative is to provide services to its members at affordable prices, or to create employment for its members. The needs of the members come first. For example, the members of a service co-operative may want to market their products at a good price. They may want to purchase goods at a bargain. They may want to be able to get a loan at a reasonable interest rate. Employees in worker co-operatives want to earn good wages. The aim of the co-operative is to provide the desired benefits as effectively as possible, in a sustainable way.

Any services provided by a co-operative must be provided mainly to its members. For example, a farmer’s marketing co-operative should market mostly crops or livestock produced by its members, not by persons outside the co-operative. The sewing machines which belong to a sewing co-operative should be mainly for the use of its members, not for people outside the co-operative.

Principles of a co-operative

• It is owned by all its members. The members each make a contribution to the co-operative (for example, part of a few month's wages)
• Management makes decisions together with the members
• Management is accountable to the members
• Members themselves decide how to organise the co-operative, for example what the wages and working hours will be
• Profit and loss is divided among the members.

Starting and registering a co-operative

The Co-operatives Act (No 14 of 2005) was implemented on 2 May 2007. This creates the foundation for a more active and supportive environment for co-operatives. The registration procedure is simpler, it re-defines government's role as a facilitator in promoting co-operatives, it provides for different types of co-operatives in all sectors of the economy, and ensures co-operative principles are observed.

Anyone starting a co-operative must first register it with the Registrar of Co-operatives at the Department of Trade and Industry. This is based in the Companies and Intellectual Property Registration Office (CIPRO) in Pretoria.

The Registrar responds to queries from the public, provides information about co-operatives and how to register them, and promotes the establishment of co-operatives in poor rural communities. The office of the Registrar is responsible for registering and deregistering co-operatives, as well as analyzing the financial statements of co-operatives. They will alsoprovide a sample constitutionfor a new co-operative and, if necessary, provide assistance in drawing up a constitution. They will also provide all the documents that are needed for the various kinds of co-operatives. The following outline summarises the steps involved in starting and registering a co-operative.

Application for registration

Before a co-operative can apply for registration, there must be at least one meeting of people who are interested in forming the co-operative. The people present at this meeting must adopt the constitution of the co-operative and elect the first directors of the co-operative.

After this meeting, the group must submit an application for registration to the Registrar of Co-operatives. This application must be made on an official form which is available from the Registrar’s office.

he group must submit the following documents to the Registrar along with the application:

- the constitution of the co-operative, signed by the members who are applying to register the co-operative (the ‘founder members’)
- a list of the names of the founder members
- a list of the names of the directors
- the registration fee, or proof that the registration fee has been paid.

The amount of the registration fee will be set by regulations made under the Co-operatives Act.

Registration

The Registrar of Co-operatives must register the co-operative if the application meets the following conditions:

- The application satisfies all the requirements in the Co-operatives Act.
- The constitution of the co-operative meets all the requirements in the Co-operatives Act.
- The constitution of the co-operative is consistent with the co-operative principles.
- The proposed name of the co-operative follows the rules in the Co-operatives Act about co-operative names.

If the Registrar is satisfied that the application meets all of these conditions, then the Registrar will give the co-operative a registration certificate with a registration number. Once a co-operative is registered, it becomes a “legal person”. This means that it has legal powers similar to those of companies and other such groups. For example, it can continue to exist even if its membership changes over time. It can open bank accounts and own land and other property. It can enter into contracts and be a party to court cases. As a “legal person”, the co-operative will have many of the same rights and powers as individuals. Before the group is registered as a co-operative, it does not have these powers.

Once the co-operative is registered, the Department of Trade and Industry will be able to give it special support if it –

(a) follows the co-operative principles
(b) consists of black people, women, youth, people who live in rural areas,
women or people with disabilities
AND
(c) promotes equity and participation by its members.

Name of co-operative

Every registered co-operative must have a name that is different from the names of other co-operatives and it must not be misleading or prohibited in some way.

The constitution of a co-operative

The Registrar of Co-operatives at the Department of Trade and Industry (DTI) will provide a sample constitutionfor a new co-operative and, if necessary, provide assistance in drawing up a constitution. You can also look up the DTI website www.dti.gov. za (click on co-operatives) for information on the what to include in a constitution.

Keeping records

The Co-operatives Act has strict record-keeping rules. A co-operative must keep the following documents at its registered office:

- its constitution and any rules made separately from the constitution
- a minute book containing the minutes of all general meetings
- a minute book containing the minutes of all meetings of the board of directors
- a list of its members with the following information for each members:

- name and address
- the date the person became a member
- the date that the person’s membership came to an end (if this has happened)
- the amount of membership fees paid
- the number of membership shares held by the member
- the number and amount of loans made to the member
- a register of its directors with the following information for each director, including both present and former directors
- name, address and ID number
- the date the person became a director
- the date that the person’s stopped being a director (if this has happened)
- the name and address of any other co-operative, company or close corporation where a director acted as a director or a member, now or in the past
- a register of all directors’ interests in contracts or other undertakings involving the co-operative
- proper accounting records, including a record of the transactions between the co-operative and each member of the co-operative.

Contact details for the Registrar of Co-operatives
Telephone: DTI call centre on 0861 843 384 and choose the option for co-operatives

For more information on how to start and register a co-operative see the following websites:

CIPRO website: www.cipro.co.za which provides on-line access to sample constitutions and other practical information;

DTI website: www.dti.giov.za

SEDA website: www.seda.org.za for up-to-date information on co-operatives and the law