Choice of company structures
South Africa has a well-developed and formally regulated company law regime. All South African companies and close corporations are governed by the Companies Act 61 of 1973, which is based on English company law. It is administered by the Registrar of Companies.
The Companies Act of 1973 regulates the formation, conduct of affairs, and liquidation of all companies. The act makes no distinction between locally owned or foreign-owned companies. Companies may be either private or public. Foreign companies establishing subsidiaries in South Africa must register the subsidiary in accordance with the act.
There is a wealth of world-class expertise that will guide an investor through the process of registering a business in South Africa. Legal, management, banking and accounting firms are supported by chambers of commerce, embassies and government offices.There are several types of businesses that can be established. The decision as to which is appropriate will depend on numerous factors, including the need for limited liability and tax transparency. The key investment vehicles for international investors are listed below.
Limited liability companies
A limited liability company will generally be the most suitable investment vehicle, since it allows great flexibility and can be used for joint ventures. Two types of limited liability company are possible in South Africa: public companies and private companies. Both are created in terms of and are governed by the provisions of the Companies Act of 1973. The act prescribes the procedures to be followed to form a private or public company.
Section 53(b)
companies
The Companies Act allows any private company to provide in its memorandum of association that the directors together with the company are jointly and severally liable for all debts and liabilities of the company incurred during their term of office.
Certain professional persons, such as attorneys and accountants, who are statutorily prevented from forming private companies may incorporate a section 53(b) company to regulate their affairs. These companies are identified by the word "Incorporated" or "Inc." after the name of the company.
Branches
A foreign company not wishing to incorporate a subsidiary in South Africa may instead set up a branch office.
Close Corporations
This is a simpler and less expensive form of corporate body than the limited liability company, which still provides for separate legal personality, perpetual succession and some form of limited liability, but
it is unlikely to be of interest to the majority of foreign investors.
Partnerships
Partnerships are useful for tax planning purposes and are frequently used to create a joint venture between two corporate entities. They may be constituted by contract or by implication from the conduct of the partners. They are not regulated by statute.
Business of Trading Trusts
A business or trading trust has several advantages over other business entities, despite recent legislation that tightens control over the conduct of trustees and trusts generally.
Joint ventures
International joint ventures represent a significant proportion of international operations in South Africa, particularly amongst the largest enterprises. The economic sectors of activities in which joint ventures are most common are research and development, national resource exploration and exploitation, engineering and
construction, production/manufacturing, buying and selling and services.
Franchising
Franchising and franchise arrangements are a popular way of doing business in South Africa. The country has more than 398 franchised systems in place and the industry employs some 260 000 people. The total number of outlets amounts to 20 885 of which 87% are locally created and 13% are international companies.
The pattern for non-South African franchisors' involvement in South Africa has frequently been to conclude a franchise agreement with one South African entity, which then acts as sub-franchisor and concludes franchise agreements with a number of local franchisees.
Franchising has an enviably free position in South African law in the sense that there are no special laws regulating it. However, certain abuses in the franchise community have appeared and there is a trend towards self-regulation.
A code of ethics, based on international norms, has been published by the South African Franchise Association (Safa). Nevertheless, there is no obligation on a franchisor to belong to Safa and it tends to turn down any applications for membership from applicants whose business practices do not meet the ethical standards. Both the Competition Authorities and the Business Practices Committee have commenced investigations into franchising with a view to formulating regulations or guidelines for the franchising community.
By far the largest franchise sector in South Africa is the fast food sector, representing approximately 29 percent of the franchise industry. Over the past 18 months, however, there has been major growth in non-food retailers, with the service industries showing the greater prominence. In addition, there are many other industries that exhibit promise for future growth, such as automotive, educational training, building and home services, business services, health and beauty services, printing, real estate, and leisure services.
Direct marketingAlthough South Africa's foreign exchange controls and import documentation requirements have been relaxed, it is recommended that overseas firms contract with a South African agent or partner. This partner would be responsible for marketing the product, holding stock, fulfilling purchasing transactions, and remitting revenue to the foreign company. Companies interested in learning more about South Africa's mail order sector may contact the South African Direct Marketing Association.
