Legal Advice

One of the most fundamental choices an entrepreneur makes is the selection of their business's legal structure. This decision lays the groundwork for tax obligations, liability protection, managerial organization, and fundraising capabilities.  Whether you are starting a small business in South Africa or expanding an existing one, understanding the pros and cons of each legal structure will help you make the best decision for your needs. 

A sole proprietorship is the simplest and most common form of business structure, especially for small businesses. As a sole proprietor, you are the only owner of your business, and there is no distinction between your personal and business finances.

When to choose a sole proprietorship: This is ideal for solo entrepreneurs with a small, low-risk business that does not require significant capital or involve complex operations.

Partnerships involve shared ownership and management between two or more individuals or entities and is often seen in professional services  like law firms, accounting practices, and medical practices.

A private company is a separate legal entity from its owners, meaning the company itself can own assets, enter contracts, and incur liabilities. This structure is popular for businesses that plan to scale or seek investment.

When to choose a private company: A private company is suitable for businesses that want to grow, scale, or attract investors while protecting owners from personal liability.

A close corporation (CC) was a popular business structure in South Africa before being phased out for new businesses in 2011. However, existing CCs are still operating under the Close Corporations Act.

When to choose a close corporation: If you already have an existing CC, it may still be a suitable structure. Otherwise, consider a private company for new businesses.

A cooperative is a business entity owned and operated by a group of people for their mutual benefit. Co-ops are often used in industries like agriculture, retail, and housing.

When to choose a cooperative: This structure works well if you are starting a community-based business with several owners who are all involved in decision-making and operations.

Choosing the right legal structure is crucial for the long-term success of your business. Sole proprietorships and partnerships are suitable for small, low-risk businesses, while private companies and close corporations offer more protection and opportunities for growth. A cooperative may be the best option if you are working in a collaborative community-focused venture. By understanding the pros and cons of each option, you can select the structure that best suits your business’s needs and goals. Always consider consulting with a legal or financial advisor to ensure your choice aligns with your objectives and growth plans.

For small businesses in South Africa looking to expand internationally, entering the world of international trade offers significant growth opportunities. However, it also comes with specific legal requirements and processes that must be carefully followed to ensure compliance and smooth operations. Here is a guide to the essential legal steps for small businesses engaged in international trade.

To engage in international trade, your business must be registered with South African Revenue Service (SARS) as an importer/exporter. This involves obtaining an import/export license if applicable. Ensure your business is compliant with the Customs and Excise Act, which governs international trade in South Africa. This registration allows you to import goods into South Africa and export goods abroad, making it a crucial first step.

South African businesses involved in international trade must understand and comply with customs duties, taxes, and tariffs on goods imported and exported. SARS requires businesses to classify their goods correctly under the Harmonized System (HS) code, which determines the applicable tariffs. You should also be aware of VAT requirements when importing goods, which could be refundable under certain circumstances.

South Africa is a member of various international trade agreements, including the Southern African Development Community (SADC) and the World Trade Organization (WTO). These agreements can affect tariffs, trade restrictions, and market access. Research the trade agreements relevant to your export market to take advantage of preferential tariffs or to understand any import restrictions that might apply.

Ensure that all shipping documents are correct and meet international standards. This includes bills of lading, certificates of origin, and invoices. It is crucial to work with reliable customs brokers and freight forwarders to ensure smooth clearance through customs.

When engaging in international trade, understanding payment methods (such as letters of credit, bank transfers, or trade financing) and dealing with foreign currencies is essential. Familiarise yourself with currency exchange regulations, which are overseen by SARS and the South African Reserve Bank (SARB).

Expanding your small business to international markets requires navigating legal requirements such as registration, tariffs, international agreements, and documentation. By understanding these processes and ensuring compliance, your business can successfully engage in international trade, opening up new growth opportunities.

Selling a small business can be a complex process, but understanding the steps and legal requirements involved can help ensure a smooth transaction. Whether you are retiring, pursuing other ventures, or simply want to exit your business, here is a breakdown of what you need to know when selling a small business in South Africa.

Accurately valuing your business is crucial before listing it for sale. This involves assessing your assets, liabilities, intellectual property, and goodwill. A professional business valuation expert can assist with this, ensuring you get a fair price. The valuation will also help in negotiations with potential buyers.

Selling a business requires a range of legal documents. Start by ensuring that your business's financial records are up to date. This includes tax returns, balance sheets, and profit-and-loss statements.

To successfully sell your business, it is important to identify potential buyers. This can be done by engaging a business broker, who can assist with finding buyers and negotiating the sale. Networking at industry events and connecting with other business owners can also help attract interested parties. Additionally, utilising online platforms and business directories can increase visibility and reach a wider audience.

Before finalising the sale, both the buyer and seller must conduct due diligence. Potential buyers should be given the opportunity to review financial records, inspect assets, and interview key employees to assess the business. Likewise, sellers should evaluate potential buyers to ensure they are financially capable and committed to the acquisition.

Next, draft a sale agreement that outlines the terms of the sale, including the sale price, payment terms, and any contingencies (such as approval from financial institutions). The sale agreement should also address the transfer of assets, liabilities, and any intellectual property or trademarks associated with the business.

You must notify your stakeholders (employees, suppliers, and customers) about the sale of your business. This is especially important if the business is in a specific industry with long-standing contracts or relationships. You should also notify relevant authorities, such as SARS, if your business is registered for VAT, income tax, or other taxes.

Once the sale agreement is signed, and the buyer’s payment is received, the transfer of ownership can occur. This includes updating business registration details with the Companies and Intellectual Property Commission (CIPC) if the business is a registered entity. Ensure that all outstanding debts are settled and that any licenses or permits are transferred to the new owner.

Selling a business may have tax implications, such as capital gains tax on the sale of assets or shares. Consult with an accountant to understand the tax implications and ensure you comply with the South African Revenue Service (SARS) requirements.

Selling a small business in South Africa involves several key steps, including valuation, legal documentation, notifying stakeholders, and transferring ownership. By understanding these steps and seeking professional advice, you can navigate the process smoothly and ensure a successful sale.

      o  Registration: Register with the Compensation Fund in terms of the Compensation for Occupational Injuries and Diseases Act (COIDA) promptly after hiring your first employee.   

     o  Premium Calculation: Premiums are calculated based on your industry, payroll, and claim history.

      o  Benefits: Cover includes wage replacement, medical expenses, temporary and permanent disability payments, and death benefits for dependents.   

      o  Coverage Limits: Choose coverage limits appropriate for your industry and potential risks.

      o  Exclusions: Understand policy exclusions, such as intentional acts or pre-existing conditions.

      o  Risk Assessment: Regularly assess your business operations to identify potential risks and adjust coverage accordingly.   

      o  Scope of Coverage: Ensure the policy covers all aspects of your professional services.

      o  Claims History: A clean claims history can lead to lower premiums.

      o  Continuous Professional Development (CPD): Maintaining CPD can demonstrate your commitment to professional standards and potentially reduce premiums.

      o  Third-Party Only (TPO) vs. Comprehensive: Balance your coverage with your budget.

      o  Driver History: Safe driving records can lead to lower premiums.

      o  Security Features: Installing security features like tracking devices can result in discounts.

By understanding and addressing these compulsory insurance needs, South African SMEs can significantly reduce their exposure to financial risks and operate with greater peace of mind.

As a small or medium-sized business owner (SMME) in South Africa, you may not initially think that the National Credit Act (NCA) applies to you. However, if your business offers credit to customers, whether it is through extended payment terms or other forms of financing, you may be considered a “credit provider” under the NCA. Understanding when this applies is crucial, as non-compliance with the NCA can result in legal and financial consequences. 

The National Credit Act (NCA) is South Africa’s primary legislation governing the provision of credit. It is designed to promote a fair, transparent, and responsible credit market and to protect consumers from unfair lending practices. The NCA applies to all credit agreements between credit providers (businesses offering credit) and consumers (individuals or entities borrowing money or receiving credit).

The Act covers a broad range of activities, including personal loans, credit card facilities, hire purchase agreements, and even some types of service agreements. It also imposes specific requirements on credit providers, such as registration with the National Credit Regulator (NCR) and adherence to responsible lending practices.

Under the NCA, a business is considered a credit provider if it provides credit as part of its ordinary course of business. This means that even if your business is primarily selling goods or services, if you allow customers to pay for these items over time, you may fall within the scope of the Act.

An SMME may be classified as a credit provider if it:

If your business is considered a credit provider, there are several legal obligations under the NCA that you need to be aware of:

If you provide credit, you are required to register as a credit provider with the National Credit Regulator (NCR). This registration process involves submitting certain documentation and paying an application fee. Only once registered are you allowed to legally offer credit under the NCA.

You must ensure that you lend responsibly. This means assessing the affordability of credit for your customers, providing clear and accurate information about the terms of credit, and ensuring that the customer understands the agreement. You must also ensure that your credit agreements are not predatory or exploitative.

The NCA requires that all credit agreements must be in writing. These agreements must clearly outline the terms and conditions, including the interest rate (if applicable), repayment schedule, and any fees involved.

As a credit provider, you must report your customers’ payment histories to a credit bureau. This helps maintain the integrity of the credit market and ensures consumers are held accountable for their credit behaviour.

You must adhere to various consumer protection rules under the NCA. This includes ensuring that consumers are not misled, that they can access credit in a fair and transparent way, and that they are protected from over-indebtedness.

As an SMME owner, it is important to understand when your business qualifies as a credit provider under the NCA. Offering credit to customers, whether it’s through instalment payments, hire purchase agreements, or any other form of deferred payment, brings with it important legal responsibilities. By ensuring compliance with the NCA, you protect your business, maintain positive customer relationships, and contribute to a fairer, more transparent credit market.

If you are unsure whether your business is considered a credit provider, it is wise to seek advice from a legal professional or contact the NCR for guidance.

A patent is an exclusive right for an invention that provides a new solution or way of doing something.

A copyright is an exclusive legal right granted to an author, designer, or similar creator of an original work. This is automatic except in respect of cinematographic films which must be registered with CIPC.

A design relates to new and original shapes and features that are aesthetic or functional. It must be able to be produced through an industrial process.

A trademark is relevant for our purposes. A trademark is a brand name, slogan, or logo that identifies and distinguishes your business and its goods and service from others.

Registering your trademark allows you to protect it when it is used by another without your consent. When you register your trademark, you are issued a registration certificate which has legal status and allows you to enforce your rights easily.

Registration also allows you to rely on the Trademarks Act, 1993. If your trademark is not registered, you can protect it using common law but this will be more onerous, expensive, and time-consuming.

A registered trademark must be renewed every ten years. Provided that it is renewed, the trademark can be registered indefinitely.

In order to register your trademark, you must meet the following requirements:

• “It does not consist exclusively of a sign or an indication which may serve, in trade, to designate the kind, quality, quantity, intended purpose, value, geographical origin or other characteristics of your goods or services, or the mode or time of their production or of rendering of the services;
• It has not become customary in your field of trade;
• It does not represent protected emblems such as the national flag or a depiction of a national monument such as Table Mountain;
• It is not offensive or contrary to the law or good morals or deceptive by nature or way of use; and
• There are no earlier conflicting rights.”

See: https://www.cipc.co.za/?page_id=4118

Certain trademarks cannot be registered because they cannot distinguish your business from others. If CIPC registered these trademarks, nobody but the trademark holders would be able to use these standard and commonly-used phrases. Examples include “24 hours”, food names like “pizza” or “cheese”, or any other word that is commonly used in a specific industry, such as “server” in the computer services industry (note, “server” could be registered for another industry like the clothing industry where the word is not commonly used).

CIPC recommends that you invent and add distinct words to your trademark that are not customary in your business’ industry. The distinct word can then be added to a non-distinctive word or phrase such as “ZiZi’s Pizza Palace”.

The process for registering your trademark is detailed on the CIPC website and summarised below:

Step 1: You must register your business as a customer on their e-service platform.

Step 2: You must deposit R590 into CIPC’s bank account using your customer code as a reference.

Step 3: Conduct a trademark search. You can search CIPCs trademarks register yourself or apply for a Special Search by CIPC at a cost of R190 per Special Search, subject to the submission of a form TM2 to CIPC.

Step 4: Apply for a trademark. Your application can be electronic or manual.

When you apply for a trademark, you must file a separate application for each international class of goods or services that you trademark will apply to. For example, two applications must be lodged if you manufacture and sell cosmetics. One in class 3 for manufacturing of non-medicated cosmetics and one application in class 35 for selling cosmetics.

The classes can be viewed at: https://www.cipc.co.za/wp-content/uploads/2023/01/12-23-class-headings-expl-notes.pdf.  CIPC can also assist you to identify the relevant classes.

Ensure that your applications include a correct address for service, This is where CIPC will communicate with you regarding your applications.

If your applications meet CIPCs requirements and you have made the required payments, CIPC will allocate and application date and number which should be used as a reference in your communications with CIPC.

If you elect to submit a manual application, you must complete form TM1 and submit the original to CIPC via post, courier service or in the CIPC drop box at the DTIC Campus, 77 Meintjies Street, Sunnyside, Pretoria.

The same rules regrading classes ad number of applications above, applies to manual applications. The class relevant to each separate application is identified in Field 51 of form TM1. You will also note all goods and service that the trademark will be used for in Field 57 of form TM1.

Registering your business’ logo, slogan and name provides you with added protection in competitive industries. It protects your business when nefarious competitors use your business’ name or logo, with which your success and goodwill is associated, to direct business away from you and to them. CIPC provides detailed guidance and valuable resources for intellectual property applications. If you are unsure how to proceed, contact an attorney to provide necessary guidance.

What is Business Rescue?

Business Rescue refers to proceedings which facilitate the rehabilitation of a company that is financially distressed by providing for—

(i) the temporary supervision of the company, and of the management of its affairs, business, and property;

(ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and

(iii) the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity

in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

Business Rescue is facilitated by a Business Rescue Practitioner who formulates a Business Rescue Plan tailored to rescuing your business.

What is the test for Business Rescue?

To be placed under Business Rescue, a company must be financially distressed.

“Financially distressed” is defined in the Act to mean that:

- it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months (commercial insolvency); or

- it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months (factual insolvency).

What is the process for Business Rescue?

Our Courts have clarified that Business Rescue proceedings must be instituted at the first signs of financial distress, to allow the company time to be rescued (see Welman v Marcelle Props 193 CC JDR 0408 (GST)).

Business Rescue can be initiated voluntarily by your business or by an affected person obtaining a court order to commence Business rescue. An affected person is a shareholder, creditor, employee, or registered trade union representing employees of your business.

To start Business Rescue proceedings, your business must file a CoR 124.1 form, a resolution by your Board resolving to commence Business rescue proceedings, and a statement setting out the facts leading to the resolution, with CIPC.

Your business must then, within 5 days of filing these documents with CIPC, publish a notice and statement detailing why the company is financially distressed, the prospects of recuing the business, and listing affected persons.

Your business must also appoint a Business Rescue Practitioner, file a notice of appointment with CIPC within 2 days of the appointment, and publish a notice of appointment within 5 days thereafter.

Business Rescue proceedings and the appointment of the Business Rescue Practitioner may be opposed by an affected person.

Business Rescue proceedings should last three months. Business Rescue commonly ends if the Business Rescue Practitioner submits a notice of termination to CIPC or if a Court converts the proceedings to liquidation proceedings.

The Effects of Business Rescue

During Business Rescue proceedings, there is a general moratorium on legal proceedings against the company. This means that no legal proceedings may be instituted against the company or its property except in the limited circumstances specified in section 133 of the Act. Guarantees or sureties in favour of a third party against the company cannot be enforced unless the Court grants leave. Prescription of claims is also suspended during the Business rescue proceedings.

Directors retain their position at the company but are required to assist and cooperate with the Business Rescue Practitioner. Directors’ powers and duties, particularly in relation to the management of the company, are limited. Any action not approved by the Business Rescue Practitioner is void. The Business Rescue Practitioner may apply to a Court to have a director removed from office if they impede the Business Rescue.

Employees remain employees during Business Rescue on the same terms and conditions as immediately prior to the commencement of the Business Rescue proceedings, unless agree otherwise. Shareholders are similarly protected by the Companies Act during Business Rescue.

With respect to contracts, section 136(2) provides that the Business Rescue Practitioner “may-

(a) entirely, partially, or conditionally suspend, for the duration of the business rescue proceedings, any obligation of the company that –

- arises under an agreement to which the company was a party at the commencement of business rescue proceedings; and

- would otherwise become due during those proceedings; or

(b)apply urgently to a court to entirely, partially, or conditionally cancel, on any terms that are just and reasonable in the circumstances, any obligation of the company contemplated in paragraph (a).”

Business rescue is a complicated process which takes your business out your hands, but, if successful, ensures that your business is rescued and continues to trade. Business rescue must be carefully considered and its consequences managed to ensure that Business Rescue meets your business’ requirements and does not result in liquidation.

As a small or medium-sized business owner (SMME) in South Africa, you may not initially think that the National Credit Act (NCA) applies to you. However, if your business offers credit to customers, whether it is through extended payment terms or other forms of financing, you may be considered a “credit provider” under the NCA.

Understanding when this applies is crucial, as non-compliance with the NCA can result in legal and financial consequences.

What is the National Credit Act (NCA)?

The National Credit Act (NCA) is South Africa’s primary legislation governing the provision of credit. It is designed to promote a fair, transparent, and responsible credit market and to protect consumers from unfair lending practices. The NCA applies to all credit agreements between credit providers (businesses offering credit) and consumers (individuals or entities borrowing money or receiving credit).

The Act covers a broad range of activities, including personal loans, credit card facilities, hire purchase agreements, and even some types of service agreements. It also imposes specific requirements on credit providers, such as registration with the National Credit Regulator (NCR) and adherence to responsible lending practices.

When Does the NCA Apply to SMMEs?

Under the NCA, a business is considered a credit provider if it provides credit as part of its ordinary course of business. This means that even if your business is primarily selling goods or services, if you allow customers to pay for these items over time, you may fall within the scope of the Act.

An SMME may be classified as a credit provider if it:

When Does an SMME NOT Qualify as a Credit Provider?

It is important to know when your business would not be considered a credit provider under the NCA.

You are not considered a credit provider if:

What Are the Requirements if You Are a Credit Provider?

If your business is considered a credit provider, there are several legal obligations under the NCA that you need to be aware of:

1.  Registration with the National Credit Regulator (NCR)

If you provide credit, you are required to register as a credit provider with the National Credit Regulator (NCR). This registration process involves submitting certain documentation and paying an application fee. Only once registered are you allowed to legally offer credit under the NCA.

2.  Responsible Lending Practices

You must ensure that you lend responsibly. This means assessing the affordability of credit for your customers, providing clear and accurate information about the terms of credit, and ensuring that the customer understands the agreement. You must also ensure that your credit agreements are not predatory or exploitative.

3.  Written Credit Agreements

The NCA requires that all credit agreements must be in writing. These agreements must clearly outline the terms and conditions, including the interest rate (if applicable), repayment schedule, and any fees involved.

4.  Credit Information Reporting

As a credit provider, you must report your customers’ payment histories to a credit bureau. This helps maintain the integrity of the credit market and ensures consumers are held accountable for their credit behaviour.

5.  Consumer Protection

You must adhere to various consumer protection rules under the NCA. This includes ensuring that consumers are not misled, that they can access credit in a fair and transparent way, and that they are protected from over-indebtedness.

Conclusion

As an SMME owner, it is important to understand when your business qualifies as a credit provider under the NCA. Offering credit to customers, whether it’s through instalment payments, hire purchase agreements, or any other form of deferred payment, brings with it important legal responsibilities. By ensuring compliance with the NCA, you protect your business, maintain positive customer relationships, and contribute to a fairer, more transparent credit market.

If you are unsure whether your business is considered a credit provider, it is wise to seek advice from a legal professional or contact the NCR for guidance.