The new Companies Act 2008 Categories of companies.
The Companies Act 2008 creates new terminology for the categories of companies.
When the new Companies Act of 2008 comes into force (and the date when it will do so has still not been announced) the business community will have to get used to some new nomenclature (and abbreviations) in relation to companies.
These include the abbreviation "NPC" for non- profit company, and references to a company's "rules" instead of "articles of association".
Categories of company under the present Companies Act of 1973
The Companies Act 1973 currently provides for the following types of companies:
a company having a share capital, which can be either-
a public company; or
a private company
a "company limited by guarantee", meaning a company which is prohibited from distributing its profits by way of dividends, and whose members undertake that, in the event of the winding-up the company, they will contribute a stipulated amount (usually a nominal amount) to the coffers of the company for the payment of its debts. All such companies are regarded as public companies. 'Section 21 companies" (that is to say, companies formed, in terms of section 21 of the Companies Act, not for the purpose of making a profit and distributing it to its shareholders, but for non-profit purposes, such as charities) have to be formed as companies limited by guarantee.
The Companies Act of 1973 also provides in section 53(b) for companies in which the directors are personally liable for its debts. The names of such companies (usually called 'section 53(b) companies") must end in "Inc". Such companies are used inter alia by most professions, such as accountants and attorneys.
In addition, the Companies Act 1973 provides for "external companies', meaning a company or other association of persons incorporated outside the Republic, whose memorandum of association has been lodged with the Registrar of Companies and which has established a place of business in the Republic.
Close corporations that are registered before the new Companies Act comes into effect will remain in existence, but no new close corporations can be registered after the new Act becomes effective. Existing close corporations can decide whether to continue in the same form when the new Companies Act becomes effective. or whether to terminate their existence, or to convert to a company.
Categories of companies under the Companies Act 2008
The Companies Act 2008 provides for a different classification of companies, as follows S 8(1) (2).
non-profit companies ("NPCs");
profit companies, which may be:
a state-owned company ("SOC");
a private company if it is not a state-owned company
personal liability companies;
public companies; (this is a residual category which will encompass any company other than the above).
A "profit company" means a company incorporated for the purpose of financial gain for its shareholders.
A more sensible categorization of companies with more meaningful names
The names of the new categories of company are more sensible than under the old Companies Act.
The term "non-profit company" is immediately understandable; and a great improvement on the old, verbose and uninformative "association incorporated under section 21".
The label "personal liability company" is more self-explanatory than "section 53(b) company".
Changes in substance as a result of the new categorisation of companies
For a businessperson, the new categorization of companies is not, of itself, going to change the way business is done. The choice between the various available business structures remains the same as before, save that, as noted above, no new close corporations can be registered alter the Companies Act 2008 comes into force.
Many charities, sporting and recreational clubs and cultural organizations whose purpose is something other than profit-making, find it useful to structure themselves as a company and thereby gain the advantage of being a legal persona, that is to say, a legal entity. This simplifies the ownership of property, the maintenance of a bank account and the issue of who has signing powers in respect of contracts.
Under the Companies Act of 1973, such organisations could register as section 21 companies. Under the Companies Act of 2008 they can register as non-profit companies. The Companies Act 2008 has a special schedule (schedule 1) devoted to non-profit companies and the Act regulates such companies more tightly than the Companies Act 1973 regulated section 21 companies.
Sensibly, the new Act (unlike the old) does not require a non-profit company to have members, and the company can choose whether or not to have members. (Since such a company does not have shares, its members cannot be called shareholders.) If it chooses to have members, it is permitted to have two classes of members, namely, voting members and non-voting members. A non- profit company is prohibited from distributing its profits by way of dividends and there is thus no compelling reason for it to have members, and it will suffice for the company merely to have a board of directors to manage its affairs. The directors will be elected by the voting members in the manner laid down in the company's memorandum of incorporation, If such a company chooses to have members. those members need not be individuals and can be juristic persons. Thus, for example, the members of a charity, established as a non-profit company, could be the profit companies that provide it with financial support.
It needs to be borne in mind that registration as a non-profit company under the 2008 Act (as with registration as a section 21 company under the 1973 Act) does not automatically quality the company for tax exemption. It is only where the company satisfies the criteria laid down in the Income Tax Act as a "public benefit organization" and is given formal approval by SARS as such, that there will be any exemption from tax.
It seems that, in the past, some section 21 companies have been abused so as to clandestinely channel value in some form to members or directors, particularly when such companies were wound up. On occasion, long-standing section 21 companies which owned land that had become very valuable were effectively hijacked by a cabal of members who wanted to gain control of the land for their personal enrichment. The new Act is more explicit than the old Act that no past or present member or director of a non-profit company is entitled to any part of the net value of the company after its liabilities have been satisfied.
[to be continued in the next issue]