8 May 2017
Starting a business can be a daunting task if you do not know where to begin. Your brilliant idea is merely the beginning of your journey to becoming an entrepreneur. There are a number of administrative, as well as legal, requirements that must be taken into consideration and with which you must comply before you can begin trading.
The decision of which business vehicle to use to operate your business is an important one as each vehicle has varying financial and legal consequences, and the nature and longevity of the business you intend to start must be carefully considered. The most commonly used business structures are sole proprietorships, partnerships and private companies.
The relationships between a company and its shareholders must be regulated and this is done in the memorandum of incorporation. This document determines the rights, responsibilities and duties to be placed on the individuals that are running the business. Further duties (fiduciary duties) are imposed on these individuals, that is, the board of directors and prescribed officers, by the common law as well as the Companies Act 71 of 2008 (The Act). The breach of these duties by the directors means that they may be held liable for any losses, damages or costs sustained by the company as a consequence of the breach.
There are a lot of statutory requirements that a company must comply with, such as the preparation on annual financial statements, filing of tax returns and annual returns. In the event that annual returns are not filed yearly, the Companies and Intellectual Property Commission will proceed to de-register the company. Should this happen, ownership of all the business’ property will automatically pass to the state and all contracts will be terminated and any debts which are due rendered unenforceable against the business. De-registration does not, however, affect any liability incurred by any former director or shareholder in respect of any act or omission that took place prior to its institution.
The thought of the business struggling financially or failing is one that keeps many entrepreneurs awake at night as it is a very real possibility. The closing down of a business takes places in one of two ways, either by liquidation or deregistration. Liquidation will occur where the business does not have sufficient assets to settle its liabilities and these assets must then be sold to cover as much of the liabilities as possible. The Act, however, now provides for business rescue proceedings where there are reasonable prospects of the business being salvaged.
Though risk is inherent in the concept of entrepreneurship, gambling with non-compliance is not a risk worth taking. The vision for your business is for the long-term, so be sure to dot your i’s and cross your t’s to ensure a strong start to a bright future.