Just as the human lifecycle starts at birth and then progresses through infancy, childhood, puberty, adulthood and ageing, ending in death, so does the business lifecycle: Start-up, growth, maturity, decline, and rebirth or death. The same strategies and plans simply do not apply at the different stages of both life and business cycles.
And this includes legal strategy. What are the legal requirements at the different stages of a business cycle?
Start-up
Type of industry, nature of offering and delivery model are key inputs in determining legal structure at the outset. At birth it is also critical to determine exit strategies, including risk management and preparing for challenges and failure.
Private companies are the most common choice as they are suitable for both small and large companies and can be managed efficiently with no requirement for filing annual financial statements.
Different types of entities include:
1Sole Proprietor and partnership:
Unincorporated (no registration formalities and compliance) and no distinction between the business and the owner. No, or very limited, growth opportunity.
The Sole Proprietor and Partnership do not exist as a separate entity, therefore legal rights and obligations (including business debts) of the business vest in the owner respectively or the partners collectively.
Sourcing funds for a sole proprietorship or partnership depends on the security that the individual owner or partners are able to provide.
2Trust:
A trustee or multiple trustees (no more than 20) set up the trust to hold assets and / or conduct business for the benefit of the trust beneficiaries. The trust must be registered with the Master of the High Court.
The advantages include that the assets of the trust belong to the trust alone (providing protection to trustees from creditors), the administration costs are less than those of a company or close corporation, and taxes are less complicated.
3Close Corporation (CC):
In terms of the Companies Act 71 of 2008 (the Companies Act), it is no longer possible to register a new CC. However, existing CCs will remain in place and can be converted to a company.
From a growth perspective, a CC is limited to ten members, each owning an agreed percentage of the business and collectively responsible for operations.
4Company:
Incorporated and regulated by the Companies Act, which encourages small business owners to register companies. A company can make shares available to the public (public company) or restrict transferability of shares to private owners only (private company).
CCs and Companies enjoy separate legal personalities and are separate to the members and shareholders. The business is conducted in the name of the CC or Company, and the assets and liabilities belong to the business, not the individual members.
Growth and Maturity
Growth and maturity means more clients and cash flow, which in turn means more risk. To assess legal risk and prepare a legal blue-print to prevent or reduce potential losses, conduct a legal audit.
This assessment may consider the degree of exposures of risk in terms of:
- Legal form and capital structure
- Regulatory compliance
- Contracts and policies
- Corporate governance
- Labour and HR
- Social media
- Intellectual property.
Decline and Death
For any given reason, many businesses fail and must shut down, whether by choice or compulsion. Different business types will have different requirements for shutting down, and if you planned correctly this process will be smoother.
Sole Proprietor and Partnership: As a sole proprietorship and partnership are not separate legal entities and unincorporated, they cease to exist when the owner or partners stop carrying on the business.
Trust: A trust will terminate by written agreement on the date set out by the founder, or either upon the achievement of the trust objective, or the realisation of the impossibility of achievement of the trust objective. On dissolution, the trust deed will dictate final distributions.
Company and CC: A company or CC can cease to operate either due to de-registration or liquidation.
A company or close corporation may be deregistered by the Companies and Intellectual Property Commission (CIPC) if it has not complied with certain requirements. The business can also voluntarily deregister when trading has ceased and it can show that it has no assets or liabilities.
